The utilities sector is the category of the stock market that comprises stocks of companies that engage in the production and delivery of water, natural gas, electric power and utility services. The utilities sector is primarily involved in gas and power that meet the needs of businesses and individuals.
Due to the huge infrastructural requirement, the companies under the utilities sector usually engage in large amounts of debt. Consequently, the sector is highly sensitive to interest rate changes. The higher the interest rate is, the higher the cost of capital for public utility firms is. However, the stocks of such companies are usually high-yielding with excellent performance in the stock market.
Utilities are capital-intensive and require a constant supply of funds to carry out upgrades to infrastructure and service. As a result, the companies seek financing from external sources to meet capital requirements. A large portion of the funds realized from operations is used to pay dividends.
Due to over-reliance of external sources of finance, utilities companies may have to pay higher interest rates on their debt, which increase the debt levels and has a negative impact on the companies’ credit ratings. Consumers usually move from one operator to another, preferring operators that are less expensive. In such situations, producers with higher cost either reduce their cost or get eliminated from the market.
Utilities stocks pay consistent dividends like bonds. Therefore, the utilities stocks compete with bonds as an investment choice in the stock market. However, when the rates of interest increase, bonds become more attractive to investors than utilities sector stocks and effect the companies’ financing, since they carry a large amount of debt.
Regardless of the level of the interest rates, some investors prefer to have the stocks of utilities companies in their portfolio. The stocks of utilities companies are one of the most sensitive in the stock market.
Subsectors under the Utilities Sector
Under the utilities sector are companies or industries that engage in the products and services offered by the following subsectors:
1. Electric Utilities
2. Gas Utilities
4. Water Utilities
5. Independent Power and Renewable Electricity Producers: Independent Power Producers and Energy Traders and Renewable Electricity
6. Telecommunication equipment suppliers
The utilities sector is very crucial to the stability of the economy and running of businesses and meeting individual’s needs.