Investors were optimistic ahead of today’s critical Fed announcement. The major indices surged in early trading, adding to yesterday’s gains. At 2 pm the Federal Reserve is expected to wrap up its 2-day FOMC meeting with an interest rate decision and economic projections, followed by a briefing by Fed Chair Powell.
The central bank is widely expected to raise rates by a quarter-point and offer a new quarterly forecast. Market watchers will be looking for clues about how many rate hikes there will be and how frequently to expect them.
David Zervos, chief marketing strategist at Jefferies, commented, “My guess is it’s going to sound a little more hawkish than people want it to sound, and that’s going to be a little tough to digest, particularly in the fixed income markets.” He continued, “I think the equity market might digest it a little bit better, but it’s going to be a tough swallow.”
With the Fed about to embark on a cycle of rate-hiking for the ages, we decided to take a look at some of the top performers from previous Fed hikes for clues on which stocks might do well. One name stood out.
Today we’ll take a look at a diversified energy company with a successful history during rate-hike cycles that speaks for itself. The stock comes equipped with an 83% Buy rating from the pros that cover it, plus a sizable dividend payout.
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Headquartered in Arlington, VA, the AES Corporation (AES) is one of the world’s leading power companies, generating and distributing power in 15 countries. The company’s diverse portfolio of thermal and renewable generation facilities and distribution businesses spans the Americas, Europe, the Middle East, and Asia. The stock has a history of outperforming the market following rate hikes.
The Fed’s most recent rate hike cycle began in 2015, during a time when inflation had fallen below the central bank’s 2% target, interest rates were increased 0.25% to 0.5%. In the six months following the hike, the S&P 500 saw a series of ups and downs but finished the period with a modest 0.3% gain. AES, however, managed to stack on almost 19% during the six months following the most recent rate hike.
Before that, Federal Reserve Chairman Ben Bernanke and his colleagues initiated an unprecedented two-year campaign in June 2004 to keep a lid on inflation following the recession of the early 2000s with a 0.25% hike to 1.25%. Six months after the initial rate hike, the S&P 500 had gained 6.2% while AES stacked on an impressive 37%.
Will history repeat this time around? There’s no telling, but the pros on Wall Street seem to see that potential. The stock garners an 83% Buy rating among the analysts offering recommendations. A median 12-month consensus price target of $30.00 represents a 34% upside from the last price.
Most recently, Goldman Sachs analyst Insoo Kin initiated coverage of the stock with a Buy rating and a $30 price target citing the company’s potential to take advantage of the material clean energy investment pipeline. The analyst predicts an approximately 8% EPS CAGR through 2025 that she sees as underappreciated at current valuations.
If you need another reason to consider AES, a quick review of its dividend history should provide inspiration. The company has steadily increased its dividend over the past ten years while maintaining a sustainable payout ratio of around 70% throughout. In February, AES raised their dividend 5% to $0.158 per share or 2.55%.
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