The growth trajectory of stocks in the utilities sector is depicting a decidedly different arc these days, according to Fidelity Portfolio Manager John Sheehy, as companies long associated with slow, steady growth, a high dividend yield, and appeal among income-seeking investors now project as having the potential for outsized earnings growth for years to come.
“Utilities are major beneficiaries of the U.S. government’s focus on infrastructure spending, the burst of interest in reshoring, and the electricity requirements of data centers designed to handle the enormous power, storage and cooling requirements of generative artificial intelligence,” says Sheehy, who has managed Fidelity® Equity Dividend Income Fund (FEQTX) since 2017. “As a result, I’m optimistic about the outlook for many power producers in this sector.”
In helming the diversified domestic equity strategy that seeks reasonable income, Sheehy favors stocks of high-quality companies with an above-market dividend yield and growth potential, and that trade at a below-average valuation. He believes stocks with these characteristics can match or exceed the performance of the broad equity market over a full market cycle, but with lower volatility.
Sheehy says spending stemming from the Inflation Reduction Act, which was signed into law in August 2022, and the construction of AI-based data centers underscore the need to modernize the nation’s aging electrical grid so that it can accommodate considerably greater demand for power, along with facilitating the rapid conversion to cleaner technologies, including solar and wind, instead of fossil fuels.
Stocks in the utilities sector represented 7% of the fund’s assets as of October 31, a notable overweight versus the benchmark Russell 3000® Value Index. Among our larger holdings is Sempra (SRE), which provides regulated utility services in California and Texas, two states Sheehy considers expanding markets. Additionally, as part of its Sempra Infrastructure division, the company develops and operates energy infrastructure to enable the energy transition in North American and worldwide markets, according to Sheehy.
“Sempra is one of the utilities that I think could particularly benefit from increased demand for power in the next several years,” Sheehy explains, adding that it is a notable overweight versus the benchmark at the end of October.
Similarly, he says he’s favored PG&E (PGE), which engages in the sale and delivery of electricity and natural gas to customers in northern and central California. It generates electricity using nuclear, hydroelectric, fossil fuel-fired, fuel cell and photovoltaic sources.
“The combination of a growing rate base in California and an improved regulatory backdrop could drive robust and durable earnings growth for PG&E,” says Sheehy.
Lastly, he highlights FirstEnergy (FE), a regulated utility based in Ohio. The company expects data centers to expand in the states where it operates, including Maryland, Ohio and Pennsylvania. Moreover, given a number of power-plant retirements, FirstEnergy’s service territory has ample brownfield sites that have land available and connectivity to the high-voltage transmission system.
“Each of these companies is poised to benefit from what I believe will be a surge in demand, and that could translate to faster earnings growth in the years to come,” Sheehy concludes.
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John Sheehy is a portfolio manager in the Equity division at Fidelity Investments.
In this role, Mr. Sheehy manages the Fidelity Advisor Equity Income Fund and Fidelity Equity Dividend Income Fund. Additionally, he co-manages the information technology and telecommunication services sleeves of Fidelity Stock Selector Large Cap Value Fund, Fidelity Series Stock Selector Large Cap Value Fund, and Fidelity Advisor Series Stock Selector Large Cap Value Fund.
Prior to assuming his current responsibilities, Mr. Sheehy co-managed Fidelity Select Banking and Select Defense and Aerospace Portfolios. He also covered various sectors as an analyst at Fidelity, including banking, aerospace and defense, and paper and packaging.
Before joining Fidelity in 2007, Mr. Sheehy worked as an audit manager at Deloitte. He has been in the financial industry since 2007.
Mr. Sheehy earned his bachelor of arts degree in economics and accounting from the College of the Holy Cross and his master of business administration degree in finance from New York University’s Stern School of Business. He is also a Certified Public Accountant (CPA).