What happened

Shares of utilities rallied sharply today. Several had surged more than 10% as of 3:15 p.m. EDT, led by American Water Works (NYSE:AWK)Southern Company (NYSE:SO), and NextEra Energy (NYSE:NEE)

While the overall rally in the stock market helped power shares of these utilities, they're also getting a boost from investors who are buying defensive stocks to position their portfolios for a potential recession. 

Power lines at dusk.

Image source: Getty Images.

So what

The utility sector as a whole is having its best day since the financial crisis. The SPDR Utilities Select Sector ETF was up 11% at 3:15 p.m. EDT, which was its biggest one-day rally since November of 2008. That's because investors are flocking to this defensive sector on concerns that the COVID-19 outbreak will cause a global recession. Utilities tend to generate relatively steady results even during periods of economic weakness, which makes them ideal options for investors seeking lower-risk opportunities.

American Water Works, which is one of the largest water utilities in the country, boasts many defensive qualities. These include rates set by regulators, a conservative dividend payout ratio, and one of the highest credit ratings in the utility sector. Those characteristics provide American Water Works with nearly recession-proof revenue and the financial flexibility needed to grow its business and dividend. In the company's view, it has enough expansion opportunities to support 7% to 10% annual dividend growth through 2024. 

NextEra Energy -- which operates two electric utilities in Florida and the world's largest renewable energy business -- shares similar defensive qualities. It has one of the highest credit ratings among the large electric utilities, a conservative dividend payout ratio, and a business that generates stable cash flow backed either by regulated rates or long-term, fixed-rate contracts. That provides it with the financial flexibility to expand its utilities and renewable energy portfolio. In NextEra's view, it can grow its earnings per share at a 6% to 8% annual rate through 2022, which should support dividend growth of around 10% per year. 

Southern Company operates electric utilities in three states and natural gas distribution companies in four states. Each of those entities generates steady cash flow backed by relatively recession-resistant sources such as regulated rates or fixed fees. It compliments that earnings stability with a solid dividend payout ratio and balance sheet. Those factors provide Southern Company with the financial flexibility to continue growing its various utilities. This expansion, in the company's estimation, will increase its earnings per share by 4% to 6% per year through at least 2023. Add that to its high-yielding dividend, and Southern Company can be a stabilizing force in an investor's portfolio during a recession.  

Now what

With nations around the world locking down their populations to prevent further spread of the COVID-19 outbreak, it will be nearly impossible for the global economy to avoid a recession. That's forcing investors to quickly adjust to this likelihood by defensively positioning their portfolios through the addition of stocks that generate steadier performance. Utilities fit that bill, which is why shares of the top ones are rallying today.