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 TV. 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 presidential candidate Hillary Clinton. Clinton recently unveiled her 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, a Clinton presidency has plenty of implications for their “boring” utility holdings.
A Focus on Clean Energy
For Hillary, her proposals are the polar opposite of her rival’s Donald Trump. Unlike Trump who has deeply supported traditional fossil fuels and coal, throughout her campaign, Hillary has supported various renewable energy sources, climate change proposals, carbon pricing, clean energy jobs, and various energy efficiency measures. Her official campaign website lists an aggressive plan to install more than half a billion solar panels by the end of her first term. Likewise, she has vowed to stop all efforts to kill the aggressive Clean Power Plan.
Additionally, Hillary has proposed the creation of a Clean Energy Challenge. The partnership is designed to get states, cities, and rural communities on the same page with regard to clean energy. Ultimately, it’ll lead to more grants and subsidies for the renewable power.
With such an aggressive stance on clean energy, naturally those utilities standing in the way of progress will suffer. Hillary continues to view the Clean Power Plan as a crucial tool in our national strategy to reduce carbon pollution and level the playing field for renewable energy. For those coal-based utilities that have been quick to change, her election could be a death sentence.
Receiving that sentence first could be American Electric Power Company (AEP ). More than 60% of the AEP generation fleet is based on coal. Coal has been a major target of the Clean Power Plan and has increased the regulation and costs associated with using the fuel. Since its passage, AEP has been quite slow to adapt to the changes. With Hillary in command, the utility could find itself looking down the barrel of a loaded gun and would be forced to act quickly — and costly — to comply with the rules.
Reversely, those utilities that have embraced clean energy solutions will be big winners under Hillary’s command. A prime example would be NextEra Energy (NEE ). Since the mid-2000s, NEE has undergone an aggressive transformation and now is the nation’s leading utility in terms of generation capacity from renewables such as solar and wind. Even its more traditional fossil fuel assets are tied to cogeneration natural gas plants that meet the Clean Energy Plan’s aggressive targets.
Also winning on the power generation front will be the independent merchant power producers that own and operate solar and wind farms. Like NextEra, AES Corporation (AES ) has undergone a major green transformation and has rid itself of many of its coal assets, in favor of solar and wind farms. Also benefiting from Hillary’s aggressive clean energy plans — and their juicy subsides — will be firms set up as YieldCos. Stocks such as 8Point3 Energy Partners LP (CAFD ) and NRG Yield (NYLD ) own renewable energy assets under long-term power contracts. Taking advantage of tax savings, the YieldCos pass on their cash flows as dividends to investors. In the end, these independent power producers could win big under Hillary’s plans, as they will get the bulk of new subsides.
Hillary’s plans aren’t exactly anti-natural gas, but they aren’t a ringing endorsement either. Although she has talked about the fuel’s use as a bridge-fuel source until renewables are able to support the grid, she has taken a hard stance against fracking. In the end, natural gas utilities like Sempra Energy (SRE ) or NiSource (NI ) may encounter higher costs with regard to buying natural gas for their customers, if Hillary clamps down on fracking. Profits could suffer as regulation limits how much utilities can charge customers for gas.
Finally, when it comes to water utilities, Hillary is a big supporter through increased infrastructure spending. Like our crumbling roads, our water systems need plenty of help as well. Increased grant money as well as tax savings/subsidies will benefit utilities like Aqua America (WTR ) or American Water Works Company Inc (AWK ). Both AWK and WTR specialize in buying/fixing old municipal water utilities across the country and will make great use of Hillary’s infrastructure plans.
The Bottom Line
Hillary Clinton’s aggressive stance toward renewable energy will upend the traditional boring utility market. Those firms that have specialized in solar, wind, and other alternatives will be the big winners if Clinton wins in November.