Written by Bob Ciura for Sure Dividend
Markets have traded in and out of bear market territory over the past few weeks as investors try to grapple with high levels of inflation and aggressive Federal Reserve rate hiking. These items alone would be enough to worry investors, but doesn’t include the ongoing Russian invasion of Ukraine or Covid-19 restrictions taking place in key countries along supply chains.
In short, there are multiple factors that could lead to a recession. For investors looking to position their portfolio to protect against such an event, we believe that utility stocks are some of the best to own for an economic downturn. People tend to prioritize utility bills, which should help prevent too much of a decline in business.
Utility stocks often pay high dividend yields as well, providing income to investors.
Three of our favorite utility stocks include:
- American Electric Power Company, Inc. (AEP)
- ONE Gas, Inc. (OGS)
- UGI Corporation (UGI)
American Electric
First up is American Electric, one of the largest regulated utility companies in the country. The company has bene in business for almost 120 years, has a market capitalization approaching $48 billion, and generates annual revenue of nearly $17 billion.
American Electric has a fairly substantial foot print. The company has 10 operating utilities that together service 5.5 million customers across 11 states, including Michigan, Ohio, Texas, and Virginia. American Electric has an aggressive plan to improve its regulated business, with the company expecting to invest $38 billion over the next four years. This should help the company see constructive rate increases as it upgrades its infrastructure.
The bulk of the capital investment plan is centered on renewable energy, which should be area that benefits American Electric. The states that the company services had been slower to get behind renewable energy, but that has begun to change. So much so that American Electric aims to have half of its generation capacity come from solar, wind, and hydro sources by the end of the current decade.
To that end, the company plans to have installed 8.6 GW of wind power and 6.6 GW of solar power by 2030. American Electric also purchased Sempra’s (SRE) renewable business in 2019, helping to bolster the company’s wind assets. This, combined with other wind projects, gives American Electric a total of 7 wind farms, giving the company four times the wind generation it had just a few years ago.
American Electric actually saw its earnings-per-share increase from 2007 to 2009, though the company did suffer a decline the following year. The trend line has been mostly positive ever since as the company has turned in a solid performance over the last decade. Earnings-per-share have improved almost 6% annually over the last 10 years.
American Electric has raised its dividend for 16 consecutive years and with a compound annual growth rate of 5.3% since 2012. Shares of the company yield 3.4%, more than twice the average yield of 1.6% for the S&P 500 Index. And with a reasonable expected payout ratio of 63% for 2022, it is likely that shareholders of American Electric will continue to receive dividend raises going forward.
ONE Gas
The next utility stock for consideration is ONE Gas, a leading natural gas utility company. The $4.4 billion company generated revenue of $1.8 billion in 2021.
ONE Gas separated from ONEOK, Inc. (OKE) in early 2014 and has grown in a short time to be one of the largest public natural gas companies in the U.S. The company operates in just three states, including Oklahoma and Kansas, where it provides the vast majority of natural gas to customers. ONE Gas also has a small market share in Texas, where it ranks as the number three distributor of natural gas.
Having dominate share in its most important states gives ONE Gas advantages over its smaller would-be peers. Competitors in these states are already starting at a distinct disadvantage to the company due to its size and scale.
ONE Gas wasn’t a separate entity during the last recession, but examining ONEOK’s performance during the period could reveal how the company might perform under adverse economic conditions. ONEOK earnings-per-share grew slightly during the Great Recession even as most other companies saw declines.
ONE Gas has done well since separation with its former parent company as earnings-per-share have nearly doubled since 2014, showing that demand for the company’s services has been robust.
These results are why ONE Gas has been able to raise its dividend for 8 consecutive years. The dividend has a CAGR of 9.9% since 2015, the first year four quarterly payments were made. ONE Gas yields 3.1%, a superior figure to that of the market average. The company has a projected payout ratio of 61% for this year, meaning that dividend growth is likely to continue.
UGI Corporation
Our final utility pick is UGI Corporation. Founded in the early 1880s, the company is valued at $8.6 billion and produces annual revenue of $7.8 billion.
UGI Corporation is more diversified than your typical utility name, even amongst the types of energy that it delivers. The company operates four main segments, including AmeriGas, which supplies propone to customers, UGI International, which distributes liquefied petroleum gas to 17 European countries, Midstream & Marketing, which provides natural gas and liquid fuels to more than 10 U.S. states, and UGI Utilities, which delivers natural gas and electricity to 700,000 customers in Pennsylvania.
In addition to a diverse business model, UGI Corporation benefits from having a diverse customer and geographic coverage. The company’s U.S. operations are concentrated on the mid-Atlantic region of the east coast of the country, but UGI Corporation does have a presence in states such as California, New York, and Ohio. Even fewer peers have an international business, putting UGI Corporation in a group almost by itself.
The company has more sources of revenue and income than most peers. For example, AmeriGas and UGI International each account for approximately 35% of net income with the UGI Utility and Midstream & Marketing each contributing close to 15%. UGI Corporation isn’t reliant on any one business, protecting it in case of weakness from any single area.
UGI Corporation’s earnings-per-share grew 33% from 2007 to 2009 as the company experienced outsized growth at a time when even many peers in the utility sector were content to see stable results. The diversified business model was a key factor in this performance.
UGI Corporation has one of the longest dividend growth streaks, with the company having paid a continuous dividend since 1885. Shareholders have received an annual raise for the past 35 years. The company’s dividend has a CAGR of 7.4% since 2012. UGI Corporation yields 3.5%, almost 200 basis points higher than the average yield for the S&P 500 Index. The company has an expected payout ratio of 52%, the lowest among the names discussed in this article.
Final Thoughts
Utilities are often a favorite of income investors because the business models and dividends they provide tend to be stable and grow over time. These stocks also tend to hold up well during recessionary environments thanks to their importance for customers.
American Electric, ONE Gas, and UGI Corporation are three of our favorite utility names as these companies have proven business models that can withstand and, in many cases, thrive during a recession. All three companies have solid dividend growth streaks and pay high yields. For investors looking for income and recession-resistant names, these three stocks could be a good addition to the portfolio.
