Energy Sector Profitability in a High-Interest Rate Environment

The energy sector, long viewed as a refuge for income-focused investors, is gaining renewed traction amid macroeconomic volatility. As central banks maintain elevated interest rates to combat inflation, utility and gas giants are demonstrating strategic resilience and earnings growth that defy conventional wisdom. Two standout examples-Tokyo Gas and Iberdrola-offer contrasting yet complementary approaches to navigating high-interest rate environments, underscoring the sector's potential as a stable, high-yield investment.

Iberdrola: Capital-Intensive Growth in Regulated Markets

Iberdrola, Spain's energy behemoth, has embraced a capital-intensive strategy to future-proof its operations. In Iberdrola's strategic plan, the company allocates €41 billion in investments, with 70% directed toward growth initiatives such as grid infrastructure and renewable energy. A staggering €21.5 billion will modernize electricity networks in the United States and United Kingdom, while €15.5 billion will fund offshore wind projects in Europe and North America. These investments are not speculative but anchored in A-rated countries with stable regulatory frameworks, reducing exposure to geopolitical and economic shocks.

The company's pivot toward regulated utilities is particularly noteworthy. By 2028, Iberdrola aims to have 65% of its gross investments in the UK and US, where regulated networks offer predictable cash flows, according to a press release. This shift ensures that 75% of its EBITDA will be insulated from volatile wholesale electricity markets, a critical advantage in a high-interest rate environment where earnings predictability is paramount. To fund these ambitions, Iberdrola executed a €5 billion capital increase in 2025, according to its 2025 results presentation, signaling confidence in its long-term value proposition.

Tokyo Gas: Shareholder Returns and Strategic Prudence

In contrast, Tokyo Gas, Japan's largest city gas provider, has prioritized shareholder returns amid rising borrowing costs. The company's recent six-month net profit surged to 129.7 billion yen ($860.2 million), driven by higher electric power sales and one-off gains, according to a Reuters report. Tokyo Gas has leveraged this profitability to announce a 200-billion-yen shareholder return plan for 2026–2028, including a 5.4% share buyback worth 80 billion yen. This approach reflects a disciplined capital allocation strategy, rewarding investors while maintaining financial flexibility.

Tokyo Gas's resilience is further bolstered by broader national strategies. Japan's consideration of a $44 billion Alaska gas pipeline, aimed at reducing trade deficits and aligning with US energy policies, could position Tokyo Gas to benefit from expanded natural gas infrastructure and cross-border partnerships, according to a Harici report. While the company's specific investments in high-interest rate environments remain less detailed than Iberdrola's, its focus on stable, regulated markets and strategic asset rotation (e.g., selling non-core assets like Mexican plants, per its strategic plan) highlights a pragmatic approach to capital preservation.

Comparative Resilience: Why Energy Stocks Thrive in High-Interest Environments

The contrasting strategies of Iberdrola and Tokyo Gas reveal a common thread: both prioritize long-term stability over short-term speculation. Iberdrola's regulated utility model and Tokyo Gas's disciplined shareholder returns cater to investors seeking predictable cash flows and capital preservation. In a high-interest rate environment, where discount rates compress the valuations of cyclical sectors, energy utilities' durable cash flows and low debt burdens become particularly attractive.

Moreover, both companies are aligning with global decarbonization trends. Iberdrola's investments in offshore wind and green hydrogen, outlined in its strategic plan, and Tokyo Gas's potential role in cross-border gas infrastructure position them to capitalize on the transition to cleaner energy without sacrificing profitability.

Conclusion: Energy as a Macro-Resilient Play

As central banks remain hawkish, energy stocks are emerging as a compelling asset class for investors seeking resilience and yield. Iberdrola's aggressive capital expenditures in regulated markets and Tokyo Gas's strategic focus on shareholder returns exemplify how utility and gas giants can thrive in high-interest rate environments. For those wary of macroeconomic turbulence, these companies offer a blueprint for balancing growth and stability-a rare combination in today's volatile markets.