With working from home becoming a new “norm” and economic activity experiencing a temporary shutdown as a result of the COVID-19 pandemic, the utilities sector witnessed a disruption in demand in the first half of 2020. Commercial and industrial power demands decreased while residential demands saw an uptick. During this phase, utilities focused on maintaining operational continuity, enhancing employee safety protocols and preparing for a return to the workplace.
With many states and businesses having now reopened, most major market indices have recovered from the lows seen in March.
Against this backdrop, we look at how the utilities sector’s performance has fared. Figure 1 tracks year-to-date total shareholder returns (TSR) for the 11 S&P 1500 sectors through mid-June. Overall, the utilities sector is down 9% and trails slightly behind the S&P 1500 index, which is down 5%. The utilities sector did see a significantly less drastic decline in stock prices when compared with other sectors, such as financials and energy.
| Sector | YTD TSR |
|---|---|
| Technology | 9% |
| Consumer discretionary | 3% |
| Communication services | 1% |
| Health care | – 3% |
| Consumer staples | – 6% |
| Utilities | – 9% |
| Materials | – 10% |
| Real estate | – 11% |
| Industrials | – 14% |
| Financials | – 21% |
| Energy | – 33% |
Source: S&P's Capital IQ database
Looking forward, investment analysts have only slightly lower expectations for the utilities sector as economic activity recommences and demand for power recovers.
Figure 2 illustrates the change in 2020 analysts’ expectations from January through June 15, 2020, for the 11 S&P 1500 industry sectors. Analysts have lowered revenue growth expectations for the companies in the utilities sector by 4%, and for the companies in the overall S&P 1500 index by 7%. Earnings before interest and taxes (EBIT) growth expectations for the utilities sector have also been lowered by approximately 4% while expectations for the companies in the index have lowered more substantially, by 22%. Overall, utilities companies have seen a modest change in analyst expectations compared with companies in most of the other sectors.
Source: S&P’s Capital IQ database
COVID-19’s impact on utilities sector financials is expected to be relatively small as demand continues to recover with the reopening of most businesses. Furthermore, utilities are enhancing their focus on cost management and cost savings. As evident in a recent Willis Towers Watson pulse survey on cost management and pay considerations in light of COVID-19, 78% of utilities indicated a freeze or reduction in hiring and approximately 40% indicated that they have already taken action or are planning to take action on reducing/delaying merit increases, salary freezes and salary reductions. Even so, we know the sector typically pays bonuses materially above target, so even the modest decline in expectations could limit bonuses below their historical trend.
Stay tuned to our Executive Pay Memo and pulse surveys for updates on the ever-changing impact of COVID-19 on the utilities sector and the economy at large.
