US Utilities: Tariffs Raise Questions About Costs, Demand, and Interest Rates
We are reaffirming our fair value estimates and moat ratings for all utilities.
Utilities have limited direct exposure to the tariffs announced by the Trump administration, but falling energy demand or regulatory pushback to utilities’ investment plans could slow earnings growth if economic conditions deteriorate.
Why it matters: Utilities are well-insulated from higher tariff-related infrastructure costs because regulators typically allow utilities to pass along higher costs through customer bills.
- Higher costs and a weaker economy could lead regulators to reevaluate utilities’ long-term growth plans. We estimate every 100-basis-point reduction in earnings growth would reduce our fair value estimates 3%-5%, on average.
- The 10-Year US Treasury yield is 132 basis points higher than the utilities’ sector dividend yield as of last week. Historically, a premium this large has been a headwind for utilities. Lower interest rates could ease financing costs for utilities and make dividends more attractive for income-oriented investors.
The bottom line: We are reaffirming our fair value estimates and moat ratings for all utilities. We continue to forecast more than 6% annual earnings and dividend growth sectorwide, supported by strong balance sheets.
- The Morningstar US Utilities Index is down 7.4% since April 2, outperforming the Morningstar US Market Index by 450 basis points.
- US utilities were 10% overvalued on a median basis before the market selloff, the richest the sector has been in three years. We now view utilities as 6% overvalued, with select pockets of value.
Long view: We think that utilities that have either strong regulatory environments, with a clear path to growth, or underappreciated growth and improving regulatory environments offer the best value for investors.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
United States