Utility Stocks Are Struggling in this High Interest Rate Environment

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Utility stocks are traditionally owned by investors for their stability and some growth through the years. During times of adverse market conditions they remain strong providing a cushion effect to a diversified portfolio and when the market booms they offer stability with decent income in the form of dividends. Investors witnessed this scenario in 2022 when the S&P 500 declined with growth stocks especially going out of favor and utilities stood as a rock. However this year it is turning out to be different. With interest rates reaching much higher utilities have struggled year-to-date. A variety of factors have made this sector unattractive in the market. Some of these factors include:

  • High interest rates of 5% or more available on Certificate of Deposits (CDs) offered by banks
  • Unpredictable bad weather from wild fires to hurricanes to tornados hitting many states
  • Challenges in approvals of rate increases by state regulators
  • Growth of renewable energy
  • Policies favoring renewable energy over traditional energy sources

Utility stocks have also become more volatile than in the past. For instance, when wildfires devastated Hawaii a few months ago, investors in Hawaiian Electric(HE) rushed to the exit like they would normally do from a tech stock. The threat of lawsuits and negative news led to a decline of over 70% in the stock price so far this year.

That said, utilities still have a place in a portfolio for any number of reasons. The most simple one is that in most cases they are monopolies in their local markets and utilities are a necessity for living.

Utilities have underperformed the overall market so far this year. The following chart shows the performance (total returns including dividends reinvested) of a select few stocks relative to the S&P 500:

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Notes:

The returns shown above are of Sept 28, 2023.

!PXTXX is the S&P 500 Total Return Index.

The chart below shows the 5-year total returns:

Click to enlarge

Source: MorningStar

From an investment standpoint, now is not the time to add utility stocks. With interest rates projected to remain high for the foreseeable future investors can wait and watch this sector.

Related stocks:

  • NextEra Energy Inc. (NEE)
  • Dominion Energy Inc. (D)
  • DTE Energy Company (DTE)
  • Duke Energy Corporation (DUK)

Related:

Disclosure: Long DTE and NEE

What Weapons Has the US Provided To Ukraine?

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Ukraine announced this week that the much-awaited Abrams tanks from the US have arrived in the country. Other European countries have given tanks to Ukraine before but they haven’t given the success that they were hyped up. So the world’s advanced Abrams tanks will be put to the test in the battlefield. In addition to these tanks, the US has given various kinds of weapons to Ukraine on top of the billions in financial aid. The following infographic shows the assortment of weapons provided so far:

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Source: Aljazeera

Valuation of US Stocks vs. Rest of the World: Chart

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US equity markets are expensive relative to other markets of the world based on the CAPE ratio according to research by Schroders UK. US stocks have been expensive for more than a decade as shown in the chart below. As the market is concentrated in tech, soaring tech stocks have accounted for the majority of the gains. To be clear, US equities have always traded at a premium when compared to the other developed market equities due to higher earnings, productivity and other factors. However the gap between the two have not been this wide and the divergence have not lasted so long. So it remains to be see if American stocks are able to maintain these high valuations in the coming years.

Click to enlarge

Source: Schroders via 3 unmissable charts in the week: oil and inflation, US valuations and pensions by Nafeesa Zaman, Fidelity UK

Related ETFs:

  • SPDR S&P 500 ETF (SPY)
  • Vanguard S&P 500 ETF (VOO)
  • Vanguard MSCI Emerging Markets ETF (VWO)
  • Vanguard Developed Markets Index Fund ETF(VEA)
  • iShares MSCI Emerging Markets ETF (EEM)

Disclosure: No positions

Two S&P 500 Index Return Charts on the Importance of Dividends

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Dividends play an important role in the total return of an equity investment. Dividend’s role is especially powerful over the long-term due to the power of compounding. The following two charts show how much dividends are critical using the example of the S&P 500 index. I have posted these charts before but these are the updated ones with 2022 data.

1.S&P 500 Total Return vs Price Return 1960 to 2022:

2.Dividends’ Contribution to SP 500 Total Return by Decade:

Source: The Power of Dividends: Past, Present, and Future, Hartford Funds

Related ETFs:

  • SPDR S&P 500 ETF (SPY)
  • Vanguard S&P 500 ETF (VOO)

Disclosure: No positions

Where Apple Makes Its Money

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Apple(AAPL) launched its latest iPhone model, the iPhone 15 earlier this month. Investors in Apple are eagerly waiting to see if this version would be a huge success or a failure. In the US, the mobile phone carriers will be helping push the model on to consumers through various deals. So the success or lack there of, of this phone would depend on how well carriers are able to make their customers switch. In many other countries, the iPhone holds a major market share relative to others. For instance, in the UK iPhone accounted for 50% of handset sales last year according to an article at Fidelity UK. In other big markets like China and India, Apple does not command a leading market share as consumers in those countries cannot afford to buy its costly phones or they are able to find even better phones at cheaper prices from the competition.

Where does Apple make its money? The following short excerpt from the piece provide some insight:

iPhone still key – but Apple is diversifying

You can gauge the importance of the iPhone to Apple when you examine how it has made its money over the years.

In the years following its launch the iPhone rose in importance until it accounted for around 80% of Apple’s gross profits by 2015. Since then, its role had diminished somewhat thanks mainly to the expansion of Apple’s ‘services’ business, which includes App Store sales and digital offerings including iCloud and Apple Music.

Using the same data, it’s possible to see how profits from different areas of the business have come through. In particular, you can see how earnings from iPhone have been highly cyclical, rising and falling with each new iPhone launch. Compare that to the steady rise of services where user subscription models have provided more steady revenue.

Source: How important is the iPhone 15 to Apple’s success? by Ed Monk, Fidelity UK

Following the auto companies, Apple is trying to see how far customers are willing to go to get its new models. The iPhone 15 Pro version would cost an astonishing $1,199 in the US. It would be interesting to watch how many of these units Apple ends up selling.

The entire article linked above is worth a read.

Disclosure: No positions