These factors could lift dividend-paying stocks in the first half of 2024, Barclays says

Published Thu, Jan 4 20243:01 PM ESTUpdated Thu, Jan 4 20243:22 PM EST

The utilities sector suffered so much in 2023, that it's due for a snapback in the new year, according to Barclays. Utilities, favored by income investors for their steady dividend payments, dropped more than 10% in 2023. The Federal Reserve's rate-hiking regime was a key culprit, as rising interest rates increase refinancing costs for utilities. They also made the stocks' dividend payments less attractive compared to the risk-free yields on Treasurys. But now these stocks are priced to move, according to Barclays analyst Nicholas Campanella. "The backdrop of the sector being one of the worst [Global Industry Classification Standard] performers in '23, along with a declining cost of capital narrative, should allow for utilities to outperform for 1H24," he wrote in a report Tuesday. XLU .SPX 1Y line Utilities Select Sector SPDR Fund vs S & P 500 in past year Campanella's team raised its industry view on utilities to positive from neutral, citing a -19% price to earnings discount to the S & P 500 based on forward P/E multiples. "Outside of disappointing price performance for 2023, we see utilities poised to benefit from similar tailwinds from grid investment opportunities and load growth in 2024, which are maintaining momentum while still adapting to the ever-changing financing and regulatory environment," Campanella said. Key factors Aside from utilities having fallen to an attractive entry point, other factors in the sector's favor include a waning cost of capital as the Fed anticipates three rate cuts in 2024. "Widening interest rates have been a major source of negative EPS revisions for the last 2 years for the group and the potential for stabilization is a noteworthy positive," the analyst said. Barclays also expects electrical demand to rise, driven by data centers, the onshoring of industrial services and opportunities around electric vehicles. Transmission companies, such as American Electric Power and Dominion Energy , are also expected to benefit from higher load outlooks and offshore wind connection, said Campanella. There are still risks hanging over the sector. For instance, state elections could put consumers' bills in focus. Utilities must go through a regulatory process, known as a rate case, to raise prices. "We continue to push investors to screen on breadth of regulatory exposure, preferring jurisdictions which are generally constructive from a return standpoint and with higher median incomes relative to rates and usage," the analyst said. This year's picks This week, Barclays upgraded its rating on Evergy to overweight from equal weight, noting that the company has moved past a key headwind: its recent rate case in Kansas. Evergy reached an agreement with Kansas regulators in November , which will result in a 3.54% rate increase for customers in the eastern third of the state. However, customers in the Kansas City metro area will see a rate decrease of about 4.53%. "The stock currently trades at a ~12% discount to large-cap peers," the analyst said. Evergy pays a dividend yield of 4.8%, but six out of the nine analysts covering the stock rate it a hold, according to LSEG, formerly known as Refinitiv. Barclays is also bullish on PG & E Corporation , naming it a top overweight for 2024 and noting its "recent 70bps [return on equity] adjustment providing higher confidence in 9-10% EPS growth." Roughly 62% of analysts covering PG & E rate it a buy or strong buy, per LSEG. PG & E recently declared a nominal one-cent per share dividend, payable Jan. 15. Duke Energy is another name Barclays favors, naming it a top overweight pick this year. "We still like the stock," Barclays said, pointing to upside to consensus earnings per share as one of the factors behind its call. Duke offers a dividend yield of 4.2%, but 12 out of the 20 analysts following the stock rate it a hold, per LSEG. — CNBC's Michael Bloom contributed reporting.