Plenty of sectors are homes to diminishing earnings expectations because of the coronavirus pandemic. One group holding mostly steady is utilities, accessible by an array of ETFs, including the Utilities Select Sector SPDR (NYSEArca: XLU).
Utilities are typically more stable stocks since the demand for their services, notably electricity and gas, is steady from both consumers and businesses. Moreover, in a lower-for-longer yield environment, utilities come with more attractive above-average dividends.
“While many sectors have witnessed a significant negative impact, are there any sectors that have not seen a substantial negative impact on earnings expectations for 2020 due to the virus?,” writes FactSet’s John Butters in a recent note. “The answer is yes. The one sector in the S&P 500 that has not seen a significant negative impact on earnings guidance or earnings estimates for 2020 due to the economic lockdown caused by COVID-19 is the utilities sector.”
Steady in the Storm
Data confirm that positive earnings guidance from the utilities sector is surprisingly strong and the second-closest sector – healthcare – isn’t all that close at all.
“In terms of guidance from companies, the utilities sector has by far the highest number of companies that confirmed previous EPS guidance for 2020 (prior to the impact of COVID-19) during their earnings calls for Q1,” according to Butters. “Of the 40 S&P 500 companies that confirmed previous EPS guidance for 2020 during this time, 21 (53%) are in the utilities sector. Given that there are only 28 companies in the utilities sector, this means 75% of the companies in this sector confirmed previous EPS guidance issued for 2020 prior to the impact of COVID-19.”
Utilities are typically more stable stocks since the demand for their services, notably electricity and gas, is steady from both consumers and businesses. Moreover, in a lower-for-longer yield environment, utilities come with more attractive above-average dividends.
Utilities’ earnings revisions are also solid compared to other sectors.
“In terms of estimate revisions (on a per-share basis), the utilities sector has recorded the smallest decline in CY 2020 EPS of all 11 sectors over the first five months of the year,” says Butters. “The annual bottom-up EPS estimate (which is an aggregation of the median 2020 EPS estimates for all the companies in the sector) for the sector decreased by 1.6% from December 31 to May 31. This is the smallest decrease of all 11 sectors over this time frame. By comparison, the annual bottom-up EPS estimate for the entire S&P 500 fell by 28.1% during this period.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
