In a brutal market environment, where even the most staid and established blue-chip companies have been forced to either cut or reduce their dividends, there seems to be few sectors that are safe from the economic fallout of the coronavirus pandemic that is ravaging companies’ earnings.
The carnage continues, this time in the energy services sector with Schlumberger (SLB) announcing yesterday an unprecedented — albeit necessary — 75% slashing of its dividend. For the moment, Chevron (CVX) remains unbowed in the face of unrelenting downward pressure on oil prices in a world where the supply is now so abundant that storage facilities will soon be full. The current payout at other companies could be in jeopardy as well, dependent on the duration of the lockdown and how soon a beleaguered and traumatized economy can bounce back.
Utilities are one sector in the economy where regulation could be a dividend or yield-starved investor’s best friend during these perilous and uncertain times. The government allows utilities by statute, a specified reasonable rate of return, regardless of changes in the economy.
The sector overall has dropped much less than the S&P 500, showing its resilience in the face of challenging conditions. The Utilities Select Sector SPDR Exchange-Traded Fund (XLU) has lost approximately 12% since the S&P 500’s Feb. 19 peak, compared to the 18% precipitous drop for the broader market. The dividend yields, after the panic selloff, remain alluring. The ETF’s recent yield is 3.5%, which is favorable compared to the 2.2% of the S&P 500.
The 2020 FactSet consensus earnings projections for the Utilities Select Sector SPDR is $3.23 a share, a slight decrease from $3.26 as of the end of February. That compares with $3.18 for the same period last year.
Some analysts argue that shares in the utility sector, as well as consumer staples, have been bid up over the past six months and are now overvalued. Nonetheless, the benefit of the relatively abundant current yields available far outweighs any premium investors would have to pay. It should be noted as well that the average utility yield of 3% or greater far exceeds the meager 0.73% current rate on the 10-year Treasury note.
Of course, there is no certainty in the coronavirus environment. The economic shock from the pandemic may pressure profits in the short term. Should the economy go from bad to worse, swelling ranks