Utilities, beloved for their dividend payments, are under pressure in today's high rate environment, but a few gems stand out in the tarnished sector, according to Bank of America. The sector has suffered through 2023, shedding 16%, as the Federal Reserve continues to roll out its policy-tightening campaign. Tougher times are ahead as companies face higher refinancing costs due to rising rates. XLU YTD mountain The Utilities Select Sector SPDR Fund is off 16% in 2023 "Many companies are facing even larger refinancing headwinds into 2024+ and persistent inflation in cost structure," wrote Julien Dumoulin-Smith in a Friday report. "There are many companies with upcoming maturities at 2% or lower interest rates coming due or recently maturing, requiring refinancing at high 5% or above 6%," he said. But there are a few opportunities in the sector, even as Bank of America says utilities aren't particularly compelling now. Seeking top buys Consolidated Edison is among the firm's top buys. "ED is uniquely positioned with no corporate debt and rate case risk," writes Dumoulin-Smith. A rate case is the regulatory process a utility must go through to determine costs charged to customers for power and gas. Bank of America also says ConEd has upside to consensus estimates for 2024 and 2025 earnings, dubbing the stock as "one of the best positioned with earnings visibility today." Shares of the stock are down 8% in 2023, and it pays a dividend of 3.7%. Two other stocks on the firm's radar are PG & E Corporation and PPL Corporation , which both have regulatory matters on the horizon. Both are also deemed top buys by Bank of America. PG & E has a California rate case development coming on Nov. 2, when the California Public Utilities Commission will be meeting. Some of the initiatives that will be discussed include steps to reduce the risk of wildfire ignition within PG & E's system. Shares are down 1% in 2023 and the company currently doesn't pay a dividend. "While a discount is appropriate today given the above-average wildfire risk, we see shares as overly penalized even after the outperformance over the last 18 months," Dumoulin-Smith said. Meanwhile, two of PPL's subsidiaries have requested regulatory approval to retire some of its coal-powered electric generation units. In turn, they would add two natural gas plants, solar generation and battery storage. A decision by the Kentucky Public Service Commission is expected by Nov. 6 . PPL pays a dividend of 4% and shares are off nearly 18% in 2023. "We maintain Buy on shares of PPL which are set to finally have regulatory clarity after a long year in its Kentucky generation transformation," Dumoulin-Smith said. "This remains a key utility pick into 2024 off current levels," he said. "This is our top 'Value' pick." — CNBC's Michael Bloom contributed to this story.
