Donald Trump’s presidency is expected to benefit defensive and domestic-oriented utilities immensely, even though conventional wisdom runs counter to this view in light of historical underperformance of high-dividend stocks in a rising interest-rate backdrop.|
During his election campaign, Trump had vowed to lower the regulatory pressure on domestic manufacturers and suggested increased investment in energy infrastructure. The new administration has started to work on these lines, with Trump signing an executive order to repeal the Clean Power plan.
This is based on Trump’s view of climate change being “a Chinese Hoax” aimed at making U.S. manufacturing “non-competitive.” This should keep fossil fuel-based electricity generation afloat longer than expected.
The abolishment of the Clean Power Plan will give a new lease of life to utilities that produce a major part of their electricity from coal. Coal still accounts for nearly 30% of the electricity produced in the U.S.
However, even without the Clean Power Plan, some large utilities like NextEra Energy (NEE) and Duke Energy Corporation (DUK) have taken the initiative to produce more electricity from natural gas and alternate sources.
We believe there needs to be a balance between emission control and clean energy generation. A constructive utility rate environment, increase in electricity production from natural gas and renewables, and supporting coal-powered projects by infrastructure investments will enable utilities to efficiently serve a larger customer base.
In the segment below, we discuss the basic strengths of the utility sector.
Regular Dividend & Share Buybacks
Utility operators generate more or less stable earnings unless there are severe factors disrupting their operations. The regulated nature of operations provides stability. These operators in turn reward their shareholders through the payment of sustainable dividends and share buybacks. This was evident during the economic crisis of 2008–2009 when utilities continued to pay dividends uninterruptedly.
