Table of ContentsIndustry DescriptionOverall Market Opportunities Leaders and Laggards AnalysisValuation Thoughts: Should We Invest Today?Industry DescriptionThe Utilities sector includes gas and gas stocks energy with public service companies made up of electricity, gas, water companies and other integrated supply companies. These companies are responsible for providing their services to the residential, commercial, industrial, and agricultural markets. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an original essay The current SPDR Fund group allocation to the utilities sector is currently driven by electricity (96.30%), water (2.27%), gas (1.27%) and sovereign (0.14%), with the maximum asset allocation in stocks at 99.84%. The industry is capital-intensive, which means a continuous influx of funds is needed for improvement and growth, especially as laws and regulations increase. Most funding for capital requirements comes from external funding sources, meaning that companies are very dependent on market conditions. If interest rates rise, they will pay more money towards their debt; Increasing debt levels may cause lower credit ratings which, in turn, will make it difficult to obtain loans at affordable rates and substantially increase the cost of doing business. Some states will allow consumers to have the option to choose their utility providers, who will obviously choose the lowest cost option. This will eliminate high cost products unless they can find a way to reduce costs. Overall, utility stocks are attractive as they generally pay reliable dividends similar to bonds. The 2008 crisis saw an increase in conservative investors buying stocks over bonds due to low interest rates, however once interest rates started to rise, bonds became more attractive again. As of January 2018, XLU has paid a 3.5% dividend, significantly higher than the yield of the S&P 500 and 10-year Treasuries. According to the S&P 500 Utilities Index, as of 9/10/2018, the total market capitalization for utilities was $717.805 billion. The free float market consisted of 667.802 billion and the average market capital was 23.936 billion. The price/earnings per share was 17.37 and the dividend yield was 3.39. Annual revenue was $845. 3B from 68,457 different businesses and utilities employed approximately 950,000 people. Projected growth for these areas for the period 2018-2023 ranged from 1.6% to 2.9%. Overall Market Opportunities There are many positive prospects regarding the utilities sector which mainly revolve around the electric and gas aspect. Non-hydro renewables, declining electricity prices, and distributed energy resources are the main focal points regarding the overall market opportunities. Non-hydro renewable energy, coming primarily from wind and solar power, has doubled from 5% in 2007 to 10%. Added to this is the closure of nearly 50 gigawatts of coal-fired generation. Natural gas is also on the rise, steadily outpacing coal on an annual basis for the first time since 2016; this can be traced back to the low price of natural gas. Wholesale electricity prices have been steadily declining by up to around 50% on average since 2014. This has helped offset the cost of expensesin capital account of public services for network upgrades and growth. Not only did it help businesses with their expenses, but it also made rising customer bills less noticeable. Looking ahead, companies are looking to continue to focus on low-cost resources such as wind, solar and natural gas. Distributed energy resources such as energy storage, microgrids, energy efficiency, electric vehicles and smart appliances could have the greatest impact on utility sector opportunities. As technology and reliability increase, consumers will be more likely to switch to environmentally friendly products to save money and reduce their carbon footprint. As stated previously, the utility sector is highly susceptible to interest rate risk which can damage the credit rating of companies with a consequent increase in the cost of capital. Another industry risk revolves around the Environmental Protection Agency (EPA) and its regulations to reduce companies' carbon footprint by 30%. To comply with these regulations and continue operating, companies are required to spend large sums of capital on upgrades. The area most affected by this is electricity utilities which rely primarily on coal with sub-standard reconstruction. Natural disasters could be another big risk to the utility sector and rising energy prices. Wildfires, which seem to occur annually, mostly in California, are causing billions of dollars not only in maintenance, but also in retrofits to protect networks and make them crash-proof. These costs are generally passed on to the consumer. Hurricanes are also a major concern as they can devastate areas causing power outages for long periods of time. Puerto Rico is a great example as they had to essentially start from scratch to rebuild their energy source, costing hundreds of billions of dollars. Finally, cybersecurity could be one of the biggest concerns when it comes to risks. A massive cyberattack could cut off electricity to hospitals, banks, factories and other resources crucial to the U.S. economy. The cybersecurity picture is starting to grow, but it's nowhere near where it should be these days. Leaders and Laggards Analysis Currently, year-to-date returns are spread across the 10 largest stocks by market cap in the utilities sector. The leaders are Exelon Corporation and NextEra Energy, with returns of 14.62% and 13.53% respectively. Exelon Corporation grew its earnings at 19.23% year-over-year and long-term earnings growth is pegged at 5.7%. Exelon has also begun reducing operating expenses with a target of 1.9% between 2018 and 2021. Exelon is reducing its overall debt by more than $4 billion over the next four years. NextEra Energy has posted strong results this year thanks in part to steady growth at its two subsidiaries, Florida Power and Light and NextEra Energy Resources. NextEra's management team reiterated solid long-term expectations of 6-8% annual EPS growth through 2021. This ranks among the best growth rates in the utilities sector. NextEra has also continued to be a leader in the use of renewable energy. It currently has 16% of installed wind capacity and 11% of all solar capacity. Laggards in the sector are Dominion Energy and The Southern Company, with returns of -6. 19% and -4. 53%.