“Utilities offer the best potential for risk-adjusted returns of any sector over the long run,” the report reads.
“While the best entry point would have been last year, they still present an attractive long-term opportunity.”
Utilities have historically suffered from poor regulatory structures, costs overruns on large projects, and higher inflation and rising natural gas prices.
From 1986 to 1988, the S&P 500 earnings per share grew 159 per cent while utilities did not grow, according to T. Rowe Price.
But all of that is in the past.
Lower natural gas prices, the conversion from coal to gas generation, and lower cost renewables have enabled utilities to grow their rate bases and profits without driving up costs for customers.
“The conventional wisdom about utilities – that companies’ fortunes are tied to the direction of interest rates and not earnings growth – is outdated,” said David Giroux, chief investment officer of Equity and Multi-Asset at T. Rowe Price.
“Industry dynamics are changing rapidly for multiple reasons, and earnings are growing at a faster rate than before. In our view, this is the only defensive sector without the risk of secular disruption.”
Of course, every sector comes with risks.
Fracking bans could raise natural gas prices and put pressure on customer bills, while poor regulation and a significant increase in inflation or interest rates could also hurt the sector.
But with geopolitical risks heightened going into 2020, and global growth slowing, it might be a case of any port in a storm.
