Practically every day, you use water to take a shower and electricity to power your home.

These activities rely upon the utilities sector, which includes companies that supply water, produce natural gas and electricity, process sewage, and more. Utilities are critical to the economy, providing the vital infrastructure that ensures you have light, heat,  clean water, and proper sanitation when you need it. Many of us take these things for granted every day. 

The sector includes companies that distribute water, gas, and electricity through farflung networks to consumers. (Telecommunications and broadband internet services are sometimes lumped together with utilities, but they’re not officially part of the sector.) With a market value of $849 billion, the utilities sector employs more than 960,000 U.S. workers, and includes 99,699 different companies.

Although the three biggest companies in this sector are energy companies, the sector includes more than that. Here’s a look at some of the biggest players below. 

• NextEra Energy, which has a market capitalization of $135.8 billion
• The $69.6 billion Duke Energy
• And Dominion Energy, with a value of $67.1 billion. Berkshire Hathaway, which is owned by Warren Buffett, acquired the natural gas portion of Dominion Energy in July, 2020 for $10 million.

Energy companies can produce energy using different types of resources, such as natural gas, nuclear energy, coal energy, solar power, wind power, and hydropower so that consumers can heat their homes and turn on the lights. But some companies solely provide electricity. American Electric, which has a market capitalization of $40 billion, is the biggest example of this kind of utility. 

Companies in water utilities ensure people can access clean water. Additionally, sewage companies use water systems to take care of waste. The three biggest publicly traded water utilities in the U.S. are: 

• American Water Works, with a market capitalization of $25.9 billion.
• Aqua America, Inc., with a market capitalization of $8.4 billion. 
• American States Water Company, with a market capitalization of $2.7 billion. 

Why people invest in the utilities sector

Utilities are what’s known as defensive stocks. Defensive stocks don’t necessarily respond to volatility in the stock market in the same way that many other stocks may because they provide staples that people likely need no matter what the economy looks like. Utility stocks are considered defensive stocks because no matter what’s going on in the economy, people typically need to cook their meals, take showers, and use their phones. 

Good to know: Defensive stocks are the opposite of cyclical stocks. Cyclical stocks drive the economy and can move more according to market fluctuations. When the economy is up, people have more “discretionary income”, or money they can spend on wants instead of just on needs. This often drives cyclical stocks up. When the economy is down, people spend less on their wants, which can drive those same stocks down. Some examples of cyclical stocks include shares in airlines, hotels, and furniture sellers.

In the most recent market downturn when the Covid-19 pandemic hit the U.S. in March, 2020, the S&P 500 Global BMI decreased 14.3% while S&P Global BMI Utilities beat the S&P 500 BMI by 2.4%. This same trend showed up in the 2008 recession, and in the 1998 and 2000 bear markets, with utilities returning an average 15% during the four worst economic periods, including the most recent one related to the pandemic.

Investors don’t just choose stocks in the utilities sector because of their defensive nature. Investments in utilities can result in higher dividends for investors. Remember that a dividend is a portion of a company’s earnings paid out to shareholders. The dividend yield of a company is calculated by dividing the company’s total annual dividend payment by its share price. The dividend yield of the utilities sector is reportedly higher than any other sector, at 3.6%

How the utilities sector is regulated

Utility companies provide essential services such as water, electricity, and natural gas to consumers. For that reason, utilities services are often a partnership between the private sector and the public sector. The government regulates utilities in order to maintain fair prices for consumers.

Here’s what regulation in the utilities sector looks like: Instead of private companies offering different prices for the service and transmission utilities, one utility company provides what different companies produce.

The government agency that oversees energy utilities is called the Federal Energy Regulatory Commission (FERC).  FERC enforces the laws and regulation governing utility companies,  and approves projects, mergers, and partnerships within the sector. Additionally, the commission monitors interstate commerce involving utility products like energy and gas, and investigates when it needs to. 

Numerous federal agencies regulate water utilities, including the Environmental Protection Agency.

A big point of contention within the sector has been deregulation. Over the course of decades, some companies and politicians have campaigned for an easing of regulations on the sector. Proponents of deregulation say that regulation actually doesn’t benefit consumers and that letting supply and demand dictate prices would mean fairer prices for consumers. 

One example is the now-defunct energy company Enron. The company lobbied to deregulate energy markets from Texas to California. Enron’s activity led to price gouging, which is the practice of hiking up prices during a crisis, severe energy shortages, and one of the biggest corporate malfeasance scandals in history.

Investing in utilities 

You can buy single stocks or exchange-traded funds (ETFs) in the utilities sector. A single stock is just that, a share of ownership of a company. Stash offers single stocks in this sector, including shares in NextEra Energy, Dominion Energy, and Duke Energy.

Alternatively, you can invest in ETFs, which are baskets of stocks, bonds, or a mixture of the two. ETFs provide investors with a way to diversify their holdings with one purchase. Stash offers ETFs in the utilities sector including High Voltage, Clean & Green, and Water the World.¹

Want to invest in the utilities sector? You can start on Stash with any dollar amount.

The post Why The Utilities Sector Is Essential to The Economy appeared first on Stash Learn.

PG&E, as the utility is known, provides electricity and gas to 16 million people in northern and central California. It employs 20,000 people.

What happened?

PG&E reportedly faces about $30 billion in liability charges for its alleged role in the 2017 and 2018 fires in California. Fires in 2018 alone caused an estimated $9 billion of damages in the state, including the deaths of 88 people and the destruction of 20,000 structures.

PG&E reportedly disclosed that some of its equipment may have malfunctioned in November 2018 near the site of the Camp Fire, the deadliest and most destructive blaze in California history.

Fire investigators claim that power lines maintained by PG&E came in contact with trees, potentially causing as many as 18 of the 21 fires that California experienced in 2017 and 2018, according to reports. A broken power transmission tower, and bullet holes in a power pole may also have contributed to the Camp Fire.

In response to the news, the company’s stock fell about 50% in morning trading, according to CNBC. The company’s chief executive officer, Geisha Williams, also stepped down.

What’s a utility?

Utilities are corporations that provide important services that keep the modern world working. These services include water, electricity, telephone service, gas, or sewer infrastructure.

Utilities can be either publicly or privately owned, but because everyone needs access to the services they offer, they are heavily regulated by either state or federal authorities.

Wait, what’s bankruptcy?

Businesses file for bankruptcy to protect themselves from creditors, which are entities or people that have loaned them money. They typically go through a court-mediated process, called Chapter 11, that allows them to reorganize and round up financing to continue operations, as well as discharge some of their debts.

PG&E will file for Chapter 11 protection, which could allow it to continue operating.

The post PG&E in Flames: Can a Public Utility Go Bankrupt? appeared first on Stash Learn.

Economy, Sector, and Industry are sort of like that. These terms are ways to break down the economy into pieces that investors can then analyze and understand.

When it comes to investing and the stock market, a sector refers to a large segment of the economy. Companies within a single sector have a common product or service.

There are 11 different sectors reflected in the U.S. Stock Market:

• Communications services
• Consumer Discretionary
• Consumer Staples
• Energy
• Financials
• Health Care
• Industrials
• Materials
• Technology
• Real Estate
• Utilities

Each sector then contains several industries. An industry is a narrower distinction that represents a specific group of companies. For instance, the materials sector can contain the chemicals and construction materials industries.

By way of example, Johnson & Johnson is part of the health care sector and the pharmaceutical industry, and Chevron is part of the energy sector and the oil & gas industry. One company can also have its feet in multiple sectors and industries.

General Electric, for example, is one company, but it’s in both the energy and industrials sectors.

An entire economy can be broken down into sectors, which, when combined, account for pretty much all the activity of the economy. Certain economies are even known for particularly successful sectors; think Saudi Arabia and energy, China and industrials, and the United States and technology—Apple, Microsoft, and Google ring any bells?

Often people choose to invest in particular sectors and industries in order to diversify their portfolios.

Often people choose to invest in particular sectors and industries in order to diversify their portfolios. Diversification is an investing technique that involves investing across varying sectors, geographies, and asset classes in order to weather the ups and downs of particular investments. Different sectors potentially behave differently in different economic environments.

This can be well illustrated by two sectors that sound similar, but are often behave individually: consumer staples and consumer discretionary. Consumer staples are the things you really need to survive, think food and beverages, household goods, and personal products. The consumer discretionary sector includes industries like retail, hotels and leisure, and clothing and apparel. During hard economic times, the consumer staples sector tends to thrive, as people continue to buy the things they need while cutting back on more discretionary purchases. During economic boom times, the consumer discretionary sector tends to benefit as people spend their extra income on travel, restaurants, and more leisure-oriented purchases.

Mutual funds and exchange-traded funds, or ETFs, often attempt to track indexes, which are groups of companies with something in common.  While some indexes, such as the Dow Jones Industrial Average are broad, others track entire sectors.

With that in mind, well-known exchanges like Nasdaq and the New York Stock Exchange (NYSE) have sector-specific indexes, such as the NASDAQ Telecommunications Index and the NYSE Health Care Index.

Fun Fact: the Dow Jones Industrials Average doesn’t only track industrials, though it used to! It was first calculated in the 1800s and made to represent the industrial sector. Now it tracks some of the largest companies in the United States like 3M, ExxonMobil, and Verizon.

As an investor, it can be important to be broadly diversified across sectors and industries. Putting all your money into one sector means that you will benefit when it is doing well, but you will feel the pangs of loss when that sector has a setback. Though even the most diversified portfolio can suffer losses as all investing involve risk, broad diversification across sectors and geographies can help to guard against loss when a particular sector suffers.

The post What’s a Sector? What’s an Industry? What’s the Difference? appeared first on Stash Learn.