By Rachel Koning Beals
Nearly 2 million electricity customers across Florida remained without power Friday, a modest improvement from the day before as the state looks to recover from Category 4 Hurricane Ian, a storm tagged as one of the worst ever to hit that part of the U.S.
In a Friday alert, there were 1,933,573 customers without power statewide, reflecting 17% of all customers, according to the state’s Public Service Commission.
For at least one fund manager dedicated to picking attractive utility stocks, how publicly-traded and highly-regulated companies prepare for and quickly react to storms like the powerful Ian can be one valuable test for selecting individual utility stocks, mutual funds or exchange-traded funds that draw heavily from the sector, to round out a portfolio. Utilities are often sought out for their dividends.
“There is no doubt [Florida’s] electric system has suffered serious damage and that customers will be without power for a significant amount of time. That said, residents should draw some solace that we believe the NextEra /zigman2/quotes/200558509/composite NEE +0.34% -owned Florida Power & Light is the best managed utility in America, particularly as it pertains to storm recovery,” said John Bartlett, president of Reaves Asset Management. NextEra was down some 1% Friday and trades about unchanged from where it stood a year ago.
Fatalities and property damage were still being assessed, with many Floridians cut off by flood waters. Ian was recategorized as a hurricane as it moved into the Carolinas on Friday .
“Florida Power & Light has also been a national leader in investing to improve system resilience. It is circumstances like this in which utilities can demonstrate the value of that spending: faster recovery time and a potentially lower storm damage expense bill charged to ratepayers,” said Bartlett.
“Over the last five years, FPL’s track record has been excellent in this regard. It will be very interesting to see just how quickly they can recover. The stock market does not seem to be worried at this point. We share the market’s confidence,” he said.
The utility is also trying to be transparent about the challenges.
“Hurricane Ian’s catastrophic winds will mean parts of our system will need to be rebuilt — not restored. Be prepared for widespread, extended outages as we are assessing the damage. We are already at work restoring power where we can do so safely,” Florida Power & Light said in a release to its customers.
With a utilities focus, Bartlett and team run the Reaves Utility Income Fund /zigman2/quotes/203557525/composite UTG -0.34% , which is down roughly 9% from where it stood at this time last year. It has a dividend yield of 7.7%. The S&P 500 /zigman2/quotes/210599714/realtime SPX -0.09% is down 16% in the same span. Meanwhile, the Virtus Reaves Utilities ETF /zigman2/quotes/207452676/composite UTES -0.97% is down 3.6% year to date but up 4.5% from where it stood one year ago.
The Fed and the IRA: Other factors to consider
Historically, because investors often buy utilities for their dividends, the Federal Reserve’s interest-rate hikes meant to stymie inflation can put comparable income generators like bonds in higher demand over utilities in a rising-rate environment. What’s more, inflation can cause utilities’ costs to outrun their revenue. That’s why it’s important to differentiate stock names within the broader sector. Investors might ask, for instance, does the regulatory body tied to a particular utility allow that utility to raise rates enough to pass higher operating costs on to consumers?
There’s also a relatively new “screen” for utility stock-picking tied to the Inflation Reduction Act, with plenty of climate change and energy provisions , passed in late summer. It earmarks federal dollars that can improve the economics for solar and wind power /zigman2/quotes/205740995/composite ICLN +1.08% generation and battery storage projects — for households but also manufacturers and the utilities themselves.
The IRA features $370 billion in spending and tax incentives on clean energy provisions. These provisions are intended to spur investments not only by traditional energy and utility companies but also by companies in adjacent industries, like transportation, real estate and manufacturing. The IRA includes significant enhancements if the projects meet certain wage, domestic manufacturing, or location requirements. It also imposes a fee on methane-related emissions and includes various other excise taxes. In all, it means that the economic health and flexibility of select utilities as they address these changes will matter for their long-run standing.
Bartlett told MarketWatch at the time of the IRA passage that the law added to his general bullishness for utilities, with some picks in favor now over others, even in this rising-rate environment.