3 Utility Stocks to Buy With Rate Cuts on the Horizon

Demand for defensive stocks is not affected much when markets are volatile because of the very nature of the stocks. Even during the 2008 financial crisis, they had not faltered. Utility stocks are examples of such defensive instruments that protect investments when the goings are not good. Whatever the state of the economy, a household or a business needs its electricity, water, or gas supplies.

The sector is known to offer investors a steady dividend income coupled with less price volatility relative to the overall market. This makes the sector a fallback option for investors during recessions and economic downturns. Alternatively, utility stocks usually fall out of favor during times of economic growth, with growth stocks driving the markets.

Of late, investors have been apprehensive about the Fed delaying its promises of interest rate cuts. While it had promised a minimum of three rate cuts in 2024 earlier, currently, it expects a 25 bps cut in September to mark the first loosening of grip on monetary policy since tightening started in early 2022. The central bank wants to analyze further economic data on jobs, inflation and various sectors before embarking on rate cuts. Also, September might be the only instance when it cuts rates this year.

Inflation has cooled down significantly in recent months. The jobs market has slowed down as well, albeit remaining robust and resilient. It looks very likely that once the Fed takes the plunge, rates will come down fast. After the 2008 sub-prime crisis, the Fed cut interest rates to stimulate the economy. On cue, investors flocked to utilities, which are viable defensive choices during macroeconomic downturns. There is no reason why history will not repeat itself. The sector has done very well this year already, with the S&P 500 Select Sector SPDR XLU advancing 15.7% year to date as of May 31, 2024.

In addition, utilities are usually considered long-term buy-and-hold options as they regularly declare dividends, and dividend yields on utility stocks are generally higher than those paid by other equities. In this environment, utility stocks provide much-required stability and growth potential. Hence, astute investors should consider such stocks at present.

Our Choices

The stocks below flaunt a Zacks Rank #1 (Strong Buy) or Rank #2 (Buy). The search was also narrowed down with a VGM Score of A or B. Here, V stands for Value, G for Growth and M for Momentum. The score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.

Vistra Corp. VST is an integrated retail electricity and power generation company. Vistra's expected earnings growth rate for the current year is 13.7%. The Zacks Consensus Estimate for its current-year earnings has improved 13% over the past 60 days. This Zacks Rank #1 company has a VGM Score of B.

Atmos Energy Corporation ATO is a regulated natural gas distribution, pipeline and storage company. Atmos' expected earnings growth rate for the current year is 10.2%. The Zacks Consensus Estimate for its current-year earnings has improved 1.8% over the past 60 days. This Zacks Rank #2 company has a VGM Score of B.

Primo Water Corporation PRMW provides water solutions for residential and commercial customers. Primo Water's expected earnings growth rate for the current year is 53.2%. The Zacks Consensus Estimate for its current-year earnings has improved 8% over the past 60 days. This Zacks Rank #2 company has a VGM Score of B

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