It’s no secret that utilities have been hot in recent years. As interest rates have continued to stay in the basement, investors have been drawn to the sector’s high dividend yields. Capital continues to flow into the industry at a torrid pace, evident by the Utilities SPDR ETF’s XLU recent returns. The proxy for the sector is up nearly 17% year-to-date. Over the last five years, it’s managed to gain 51%.
And there is plenty of reason for the optimism.
Utilities high dividends are derived from their stable operating and steady fixed costs. Providing electricity, water and natural gas to customers, big and small, is pretty recession resistant. Even in times of economic uncertainty, consumers will still need to take showers and watch T.V. That constant demand helps to power cash flows at the major utilities and, in turn, powers their dividends.
But utilities investors currently riding high may get a dose of reality soon enough. And that jolt won’t be coming from the Federal Reserve, but from President Donald Trump. Trump recently unveiled his energy policy plans, and the proposals have the potential to upend the current utility industry and create a different batch of winners and losers among its sub-sectors.
For investors, Trump’s presidency has plenty of implications for their ‘boring’ utility holdings.
Traditional Republican Energy Values
It’s fitting that Trump formally announced his energy policy plans in the heart of the Bakken Shale during a campaign stop in North Dakota last May. In a 45-minute stump speech, Trump’s plan hit on all the traditional Republican priorities, including a hefty dose of free-markets, reduced regulation and a higher percentage of fossil fuels versus their alternatives.
When it comes to power generation, Trump’s policies focus on returning to a coal-based electricity grid. In his first 100 days of the Presidency, Trump has vowed to end the recent, wide-sweeping Environmental Protection Agency (EPA) regulations that includes the landmark Clean Power Plan. The Plan is designed to cut carbon emissions by 32% from the power sector by 2030. Under the Plan, many utilities have been forced to shut down old coal plants, prevent construction on new ones and add a hefty dose of renewables to their generation mixes.
As for those renewables – like solar and wind – Trump has expressed displeasure for alternative forms of energy, citing them as expensive and needing substantial subsidies to work. Trump pledged he would make a level playing field for all forms of energy by allowing their true costs to be reflected.
Under these guidelines, American Electric Power Company (AEP ) could be a big buy. The firm is the last of the so-called ‘old guard’ of American utilities and has the largest coal-fired generation assets in the sector. Currently, coal-fired power plants account for approximately 60% of AEP’s generating capacity, and that’s after thousands of megawatts worth of coal power have been shut down under the Clean Power Plan. Meanwhile, AEP hasn’t added any renewables – minus some hydroelectric assets – to its mix. With Trump’s election, AEP can sit back and continue operating as scheduled.
Like AEP, old-school electric utility Duke Energy (DUK ) could be a big buy. First, the firm features large coal-fired generating assets, as well as plenty of natural gas assets. However, DUK could benefit in other ways. Duke has been subject to coal-ash fines and regulation in recent years. Those fines have been pretty crippling, and the firm has spent a pretty penny in court trying to fight them. Under Trump’s plan, DUK could see fewer fines and regulations, which would ultimately boost its bottom line.
A big sell could be NextEra Energy (NEE ). NEE leads the nation in terms of wind and solar generation assets, and continues to add these assets at a rapid pace. However, with a Trump presidency, many of the lucrative tax advantages and subsidies that NextEra has received could be up in smoke. That would put a damper on the firm and its business model. Likewise, renewables-focused NRG Energy (NRG ) could also suffer.
When it comes to natural gas, Southern Co (SO ) made one heck of a recent purchase. The firm just closed on its deal to buy gas utility AGL Resources, giving it miles of natural gas pipelines and tank farms. With fracking a major talking point of his campaign, those natural gas assets could be the icing on the cake for the electric utility – especially if it puts them in a tax-advantaged MLP.
However, natural gas utility NiSource Inc (NI ) may have missed the Trump boat. The firm spun off all its lucrative pipeline and storage assets to focus instead on the distribution side of the business. Under Trump’s presidency, NI could be a sell, when compared to its peers.
A surprising win for the utilities sector under Trump would be water-focused utilities. Trump has proposed using revenues generated under generous fracking licenses on Federal lands to upgrade America’s infrastructure. Like our crumbling roads and bridges, America’s water infrastructure is in need of help. Grants and subsidies to local or national water utilities could be a big benefit for the firms, and generate plenty of revenue down the line.
Aqua America Inc (WTR ) could be uniquely set up to benefit from Trump’s plan. WTR’s main bread-n-butter is finding struggling local water utilities in need of both physical and financial repair. By offering to buyout and fix up these utilities, Aqua America has continued to expand its cash flows and market area immensely over the years. By having a steady source of funding through Trump’s plan, WTR could carry out a major buyout binge in the sector. And with less regulation, it may just get that wish.
The Bottom Line
While his energy policy speaks to traditional Republican voters, Trump’s win could shake up the utility industry (and what if Clinton had won?). The mantra of more fossil fuels and less regulation will ultimately benefit some utilities over others. The previous picks are some examples of who the winners and losers will likely be.