The S&P 500 was last seen up 10% in 2024 and was up 27% from this time in 2023. The utilities sector has lagged by many means. Suddenly, utilities are back in favor and the Utilities Select Sector SPDR ETF (NYSEArca: XLU) is outperforming the broader market. Utilities were last seen up about 13% year-to-date, but that’s only up about 3.5% from a year ago. Many utilities remain 10% to 20% lower than their all-time highs set in the last two to three years.

Many utilities have continued to offer projected earnings growth in their guidance. Many of those have also been able to continue raising their dividends despite the expensive operational challenges they have faced since the Federal Reserve’s rate-hike campaign began. This should show at least some confidence that long-term dividend and income investors crave.

Now Wall Street analysts have started raising price targets on the top utilities stocks. It turns out that the endless waves of high interest rates, higher capital spending, environmental pressure and increased regulations are all starting to fade. And there is an election later in 2024 and investors, despite pesky inflation, still feel the Federal Reserve’s next directional move will be lower after its 11 rate-hike campaign.

Analysts typically lower price targets as earnings and share prices go lower. They usually do not try to catch the bottom and “pound the table with screaming buys” when major moves are occurring. That’s particularly true for utilities. It may take some time to play out but analyst price target hikes (and their ratings) in many of the top utilities have a long way to go before they get back to where they were in 2021 and 2022.

THE INTEREST RATE GAME

It certainly seems that the big catalyst for utilities will be interest rates. When rates will be cut by the Federal Reserve remains up for debate. After all, 3.4% inflation is still well above the historic norms of the prior 15 years. And well above 2.0% to 2.5% Fed target rate. The Fed may have to decide it’s “close enough” for government work because higher rates are impacting housing, corporate borrowing, lines of credit to small businesses, and even credit card rates.

If the next 100 basis point directional move in short-term rates is lower, even if that “when” is delayed, it’s the catalyst helping ease the minds of utilities investors. And, once short-term rates come down, these utilities dividend yields will again be superior for investors who want and need income.

BUT…. MAYBE SHORT-TERM OVERBOUGHT?

Tactical Bulls noted recently that the Utilities sector was finally looking safe for investors again. That does not imply that the stocks should only rise from here. In fact, some of the key utilities have even looked overbought using short-term technical and charting tools like MACD and RSI scores. And the most recent annual inflation reading (CPI) of 3.4% for April that was cheered by investors on May 15 is still quite high versus before inflation ramped up.

A tactical bullish view for utilities at the present time might involve limit orders for pullbacks or even writing puts. For those investors who already own utilities stocks and see prices rising in the next year they may decide to skip selling covered calls because these could get called away. And when stocks get called away from writing call options, many investors “forget” or choose not to repurchase the same one because it’s probably at a higher price than their option-adjusted sale price.

AND… THE BIG UTILITIES

The focus here is on the largest utilities in America. They are, after all, generally the most widely-held and considered to be among the safest (if there is such a thing) by investors. So here are some of the major analyst ratings and price target changes that have been seen over the last 45 days.

American Electric Power Company, Inc. (NYSE: AEP) was last seen trading at $91.00, above its consensus analyst price target of $88.78. AEP’s dividend yield is nearly 3.9% and this was a $105 stock back at its peak. Multiple analysts have raised their targets prior to and since AEP reaffirmed its 2024 guidance:

• BMO Capital (Outperform) to $99 from $95 on May 14, its second price hike in a month.
• RBC Capital (Outperform) to $100 from $90 on May 3.
• Barclays (Equal-Weight) to $88 from $84 on May 2.
• Scotiabank (Outperform) to 90 from $86 on May 1.
• Wells Fargo (Equal-Weight) to $89 from $84 on May 1.

American Water Works Co. Inc. (NYSE: AWK) is the leading water utility player in America. It is still quite small in the “XLU” ETF with a $26 billion valuation, but it is effectively the same size in market cap as the remaining public U.S. water utilities combined. Water investors have grown to accept lower dividends versus electric and gas utilities, and American Water’s dividend yield is about 2.3%. This stock peaked close to $190 at the end of 2021, so the recent lows under $115 represented a full 40% plunge from its highs. The most recent price of $133.00 was quite close to the $137 consensus analyst price target.

UBS maintained its Neutral rating while raising its price target to $139 from $124 on May 13. Analysts have yet to issue major upgrades and huge price target hikes for American Water, but it is undeniable that these targets were much higher in the prior bullish cycle for water utilities.

Constellation Energy Corporation (NYSE: CEG) was last seen trading at $217.00 and its dividend is still less than 1% despite a recent dividend hike. Shares of Constellation have risen more than 15% since the end of April, driven in part by earnings exceeding expectations. Its stock has recently also risen above the consensus analyst target price of $211.36 but multiple analysts have issued fresh price target hikes:

• Wells Fargo (Overweight) to $250 from $215 on May 15.
• BMO Capital (Outperform) to $247 from $200 on May 13.
• Mizuho (Neutral) to $217 from $132 on May 10.

Duke Energy Corp. (NYSE: DUK) was last seen at $102, about $3 shy of the consensus analyst target price. Duke is only up about 5% so far in 2024 and its former high stock price was $115 before the Fed’s rate hikes and other sector woes bit into its shares. Duke also sports a 4% dividend yield. While Scotiabank cut its target to $94 from $101 late in April, here is the wave of price target hikes seen in April and May:

• BMO Capital (Outperform) to $108 from $104 on May 8.
• Barclays (Overweight) to $100 from $99 on April 15.
• BofA Securities (Neutral) to $100 from $96 on April 11.
• Mizuho (Neutral) to $99 from $89 on April 5.

NextEra Energy, Inc. (NYSE: NEE) is the largest public utility of them all. Its stock was close to $75.00 on last look, up from about $55.00 at the start of March. That stock gain is still about $20.00 short of its peak at the end of 2021. The stock has now risen above the $73.50 consensus analyst target price. NextEra’s dividend yield is about 2.7%. Multiple price targets have been raised in recent weeks:

• Wells Fargo (Overweight) to $95 from $85 on May 15.
• BMO Capital (Outperform) to $78 from $72 on May 7, its second hike within a month.
• Mizuho (Buy) to $71 from $67 on April 24.
• BofA Securities (Neutral) to $67 from $61 on April 23.

FirstEnergy Corp. (NYSE: FE) has come back above $40.00 for the first time a year. This utility was a $50 stock before the pandemic and it was above 442 before its bribery scandal. Now it is has recovered and the impacts of the scandal seem to be behind it. FirstEnergy has had two recent dividend hikes to boost investor confidence. It sports nearly a 4.3% dividend yield. The consensus price target is $41.60.

• Earlier in April, Goldman Sachs started coverage with a $45.00 price target.
• On April 23, BofA Securities maintained its Underperform rating but raised its price objective to $35 from $30 (shares were at $37.80 then).

And to show both sides of the coin when it is there, an April 22 research report from Scotiabank maintained its Sector Perform rating on FirstEnergy while cutting its price target to $40 from $41 (versus $37.76 at the time).

The Southern Company (NYSE: SO) was last seen up around $79.00, above its $76.76 consensus analyst target price. Southern Company has nearly a 3.7% dividend yield and it is actually near its former peak of the last five years. Analyst calls have not had major Buy ratings due to valuation, and a likely outperformance of the stock, but Scotiabank maintained its Outperform rating while trimming its price target to $77 from $80 on April 22. These other price target hikes were seen even if they are under the recent stock price:

• Wells Fargo (Equal Weight) to $77 from $72 on May 3.
• BofA Securities (Neutral) to $73 from $70 on April 23.
• Barclays (Equal-Weight) to $66 from $65 on April 15.