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Overblown rate fears creating opportunities in utilities

Long-term, fundamentals-focused investors should check out these utilities regardless of where rates are going.

Travis Miller 7 September, 2018 | 5:00PM
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Travis Miller: For utilities investors eyeing the macro landscape seeing interest rates rising, typically they might think that that will mean utilities will fall. We looked at 25 years of data and found that utilities were just as likely to rise as interest rates were rising as they were to fall when rates were rising as well. What we think investors should do is turn to the fundamentals--look at growth, valuation, and income when assessing utilities, and forget about which direction interest rates will go.

For income investors, we like two names: PPL and Duke Energy. For PPL and Duke, both trade well above a 4% yield. We think there's 4% earnings and dividend growth available there. We also think they trade at substantial discounts to their fair value.

For value investors looking to take on a little more risk, we like South Carolina utility Scana. Scana faces some regulatory and political challenges with its new nuclear project that it abandoned last year. The stock trades around US$40 per share, but if it can resolve those regulatory and political challenges by year end and get near-full recovery of those project costs that's invested, we think that it could have a lot more upside.

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Travis Miller

Travis Miller  Travis Miller is an energy and utilities strategist for Morningstar.

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