Central banks on both sides of the Canada-US border have signaled that higher interest rates are ahead. Recent public announcements by the Bank of Canada and the United States Federal Reserve included language that implied that the era of accommodative policy was over and that it was necessary to raise key interest rates to control the inflation spiral.

Although a rise in interest rates is widely seen as a sign of economic strength and generally supportive of stock markets, it tends to have a negative impact on certain sectors. For investors, this means that stocks in sectors such as telecommunications and utilities call for a fresh look. The prices of these stocks have an inverse relationship with interest rates. Utilities and telecommunications operations are capital intensive. Consequently, these companies must frequently borrow capital to support growth and build infrastructure. When interest rates rise, the cost of borrowing inflates, which is negative for the following interest-rate-sensitive businesses.

Southern Company

Teleprinter

SO

Current yield:

3.83%

Price

$69

Just value:

$64

Value

Fairly valued

Pit

Narrow

Moat trend

Stable

Star Rating

***

Data as of January 31, 2022

One of the largest utilities in the United States, (SO) distributes electricity and natural gas to approximately 9 million customers in nine states. It has 50 gigawatts of rate-regulated generation capacity, serving customers in Georgia, Alabama and Mississippi. The company admits in a press release that fluctuations in interest rates can have a significant impact on its finances.

Southern is turning to green power as part of one of the most dramatic transformations in the utility industry. “In 2000, nearly 80% of the electricity sold by Southern to its customers was generated from coal, [however] that share has now fallen to 20% and falling,” a Morningstar report states. The Southern Power Co. subsidiary has 12 gigawatts of mostly unregulated renewable energy capacity and sells power primarily under long-term power sales agreements.

As the company tries to reduce its greenhouse gas emissions, the share of nuclear, natural gas and renewable energy is increasing. Southern aims to “retire all but eight coal-fired plants by 2028 and achieve net-zero carbon emissions from its power generation fleet by 2050,” says Morningstar strategist Travis Miller.

“The dividend has grown more slowly than earnings in recent years due to growth investments by Southern, including Vogtle, but dividend growth is expected to accelerate to match earnings growth once Vogtle ends,” Miller says. , which puts the stock’s fair value at US$64.

Dominion Energy Inc

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D

Current yield:

3.17%

Price

$79.46

Just value:

$81

Value

Fairly valued

Pit

Large

Moat trend

Stable

Star Rating

***

Data as of January 31, 2022

The American integrated energy giant, Dominion Energy (D) generates about 30 gigawatts of electricity. The company has a liquefied natural gas export facility in Maryland and is currently starting up a 5.2 GW wind farm in Virginia. Dominion is committed to clean energy and working to achieve net zero carbon dioxide and methane emissions from its power generation and gas infrastructure operations by 2050 .

“After exiting its oil and gas exploration and production business, selling off and retiring its generation of no-moth traders, Dominion investors are left with a mostly regulated utility,” a Morningstar equity report says. , emphasizing that this “strategic pivot has been in the best interests of shareholders.” Over the next 15 years, Dominion expects $72 billion in capital investment opportunities, including $17 billion in what is expected to be l one of the largest offshore wind farms in the United States, notes the report.

“Dominion’s other growth opportunities include solar power, energy storage, nuclear life extensions, power grid upgrades and gas distribution modernizations,” said Andrew Bischof, Morningstar stock analyst, who puts the stock’s fair value at $81.

The utility’s renewable energy portfolio is expected to grow from about 4 gigawatts in 2020 to nearly 30 GW by 2035. “These investments are supporting annual earnings per share growth of 6.5%,” Bischof says.

Rogers Communications Inc Class B

Teleprinter

RCI.B

Current yield:

3.10%

Price

$64.61

Just value:

$68

Value

Fairly valued

Pit

Narrow

Moat trend

Negative

Star rating

***

Data as of January 31, 2022

Canada’s largest wireless service provider, Rogers Inc (RCI.B) has more than 10 million subscribers, about one-third of the total Canadian market. Rogers’ wireless business accounts for 60% of the company’s total sales, the cable segment provides about 25% of total sales, while the rest comes from Rogers’ media unit (various television and radio stations and the Toronto Blue Jays). The company also has stakes in other sports franchises, including the Toronto Maple Leafs, Raptors, FC and Argonauts.

“In a Canadian telecommunications industry that has been crushed by the pandemic, Rogers has been hardest hit due to its greater reliance on wireless roaming revenue and professional sporting events,” reads a report on shares of Morningstar. These headwinds are temporary, however, and Rogers’ fourth quarter 2021 results show the recovery is well underway. Rebounding from the pandemic, the company’s wireless revenue grew 6% year-over-year, driven by 130,000 postpaid net additions and 3% growth in average revenue per user (ARPU ) wireless.

However, the biggest opportunity to drive wireless revenue growth will come from the return of roaming, which remains more than 20% below pre-pandemic levels. “We expect omicron to lag roaming growth in 2022, but expect a full recovery to be an ARPU tailwind for the next two years,” the equity analyst said. from Morningstar, Matthew Dolgin, who pegs the stock’s fair value at $68.