Sometimes utility stocks can feel downright sleepy, and it can be comforting when the markets go awry. But you shouldn’t overlook the growth potential that could add some excitement to an already lucrative field.
The exchange-traded fund (ticker: XLU) returned 0.2% in 2022 including reinvested dividends, easily
17% drop. Despite some hiccups due to rising yields that typically plague income-oriented stocks, the sector has done exactly what investors hoped- would protect their cash during tough times.
And times are tough. With rising costs and rising labor costs, companies are busy reducing their profit estimates. not utilities. Mizuho Securities analyst Anthony Crowdell expects the sector’s earnings to grow at a 5% to 7% clip due to the regulated nature of the business. This should make them resilient even in the economic downturn. “While it is still a matter of debate whether the economy is headed for a recession, the utility sector has transitioned to a pure-play regulated model, which we believe will make them more vulnerable if the economy hits a rough patch. Will make you more defensive.”
Utilities also offer some development to go along with that stability. The rise of electric vehicles means that demand for electricity is only likely to increase in the coming years, says Jay Rem, CEO of Reeves Asset Management, which manages
ETFs (UTES). Utilities will also benefit from the renewable energy pivot. Because of regulations, utilities can’t make big profits from higher coal or natural-gas prices. But they can earn more than capital projects – and operating expenses are reduced because the wind and sun are free.
This combination of development and security isn’t cheap, but it’s not as expensive as it looks. The utilities trade at nearly 19 times 2023 earnings, up from 17 times the S&P 500. But the index’s earnings are declining, meaning it actually trades closer to 19 times — and utilities usually get a premium to the market.
Here are six possible.
(AES) offers investors a stable, regulated utility business that is rapidly transitioning to renewable energy. It has become one of the world’s largest solar developers and a major provider of renewable wind, solar and battery backup technology to commercial customers, including
The company is slashing its coal-fired power generation, which should be less than 10% of the total by 2025, from around 25%. It also has about 59 million shares.
(see below). Yet AES trades at a huge discount to other utilities and the S&P 500. RBC analyst Shelby Tucker has a $30 price target on the stock, up nearly 50% from Wednesday’s close.
California is a scary place to operate a utility—which makes
(EIX) stock cheaper. With wildfire season upon us, it’s easy to imagine a worst-case scenario, with fires causing billions of dollars in damage and Edison to blame. Rem says the risk may not be as great as it once was. California has done a great job of implementing an insurance fund to help utilities avoid the big hits of the past, while utilities have better improved their management of risks. Edison’s stock trades at about 13 times expected 2023 earnings, a discount to peers and the market, even though earnings are expected to grow an average of about 6% per year over the coming few years. It also pays a chunky dividend.
For investors interested in security,
(ETR) is on the defensive, with approximately 85% of sales coming from regulated utility operations in Arkansas, Louisiana, Mississippi and Texas. Wall Street forecasts earnings growth on average of about 7% per year for the coming few years, up from 6% previously. After hurricanes and hurricanes in 2020 and 2021, Entergy is asking regulators to approve $15 billion in grid-resilience spending, which would give customers more reliable power and allow utilities to earn a return on spent capital. making it a “win-win”. for the company and its customers,” writes Mizuo analyst Paul Fremont. Its price target is $123 per share, which is up about 12% from recent levels.
Sustainability Is So Important to Usability—Just Ask the Chicago-based
(EXC). It kicked out the unregulated electricity provider
(CEG) earlier this year, and it has made all the difference. Before the spinoff, earnings fluctuated from year to year and the stock traded at just 12 times earnings. With Constellations gone, earnings are more stable and are expected to grow at 7% per year through 2025, while stocks yield about 18 times earnings. Exelon may also begin focusing on improving its energy transmission business using the funds earmarked for Constellation. “Now that it’s over, the utility has better credit metrics, is a highly-valued stock,” Rem says.
For those who want a little risk with their utility investments, there is
(FLNC). company, a joint venture between AES and
(SIE.Germany), sells battery storage, services and software for renewable-power generation. It went public in October at $28, but began to fall when the Fed first hinted at higher rates in November. Still, battery storage is one of the pillars of a sustainable-energy future, allowing for reliable power, even when the sun isn’t shining and the wind isn’t blowing.
Analyst Jorge Gianaricas expects Fluence to turn a profit around 2024, and generate $159 million in free cash flow by 2025. It has more than $650 million on its balance sheet.
(NEE), the largest utility in the S&P 500 and a leader in renewable energy, is benefiting from migration to Florida, where it generates most of its revenue. But the stock has been volatile due to a recent Commerce Department investigation into solar imports, which will result in fewer panels available to complete its projects. Those issues seem to be behind it, at least for now, and NextEra just turned in its second-quarter earnings report. The stock isn’t cheap — it trades at 26 times 2023 earnings, too expensive for a utility — but it has a reputation as a quality operator, and earnings have grown an average of about 8% per year over the past five years.
write to Al Root firstname.lastname@example.org