Contractors working on photovoltaic modules at an AES solar park in Brazil.
Jonne Roriz/Bloomberg
text size
Sometimes utility stocks can feel sleepy, and that can be comforting when the markets get rough. But you shouldn’t overlook the growth potential that could add some energy to an already attractive sector.
the
the exchange-traded fund (ticker: XLU) has returned 0.2%, including reinvested dividends, in 2022, easily outperforming the
S&P 500‘s
17% drop. Despite some headwinds from rising yields, which typically hurt income-oriented stocks, the sector has done exactly what investors hoped for: protect their cash in tough times.
And times are tough. Companies have been busy cutting their profit estimates as rising input prices and higher labor costs squeeze margins. Not utilities. Mizuho Securities analyst Anthony Crowdell expects sector earnings to grow 5-7% due to the regulated nature of the business. That should make them resilient, even in an economic downturn. “While it is still debatable whether the economy is headed for a recession, the utilities sector has transitioned to a regulated, pure-play model that we believe will make them more defensive if the economy hits a rough patch,” he writes.
Public services also offer some growth to accompany that stability. The rise of electric vehicles means energy demand is likely to increase in the coming years, says Reaves Asset Management CEO Jay Rhame, who manages the
ETFs (UTES). The shift to renewable energy will also benefit utilities. Due to regulations, utilities cannot make larger profits from higher coal or natural gas prices. But they can earn more from capital projects, and operating expenses are reduced because wind and sun are free.
That combination of growth and security doesn’t come cheap, but it’s not as expensive as it sounds. Utilities trade at about 19 times 2023 earnings, up from 17 times for the S&P 500. But the index’s earnings are slipping, meaning it’s actually trading at something closer to 19 times, and utility companies Utilities typically fetch a premium in the marketplace.
Here are six with potential.
AES Corporation
| Data key | |
|---|---|
| Heart | AES |
| recent price | $20.35 |
| Change year to date | -sixteen |
| P/E ratio | 11.6x |
| Dividend yield | 3.10% |
Source: Bloomberg
AES Corporation
(AES) offers investors a stable and regulated utility business, one that is rapidly transitioning to renewable energy. It has become one of the world’s largest solar power developers and is a major provider of renewable wind, solar and battery backup technology to commercial customers, including
Microsoft
,
Alphabet
,
Y
amazon.com
.
The company has been reducing its coal-fired power generation, which should account for less than 10% of its total by 2025, down from about 25%. He also owns about 59 million shares of
creep energy
(see below). However, AES trades at a deep discount to other utilities and the S&P 500. RBC analyst Shelby Tucker has a $30 price target on the stock, nearly 50% higher than Wednesday’s close.
edison international
| Data key | |
|---|---|
| Heart | EIX |
| recent price | $63.39 |
| Change year to date | -7% |
| P/E ratio | 13x |
| Dividend yield | 4.40% |
Source: Bloomberg
California is a scary place to operate a utility, which is what it does
edison international
(EIX) cheap stocks. With wildfire season upon us, it’s easy to imagine a worst-case scenario, with fires causing billions of dollars in damage and Edison being blamed for it. The risk may not be as great as it once was, says Rhame. California has done a good job of implementing an insurance fund to help utilities avoid the big hits of the past, while utilities have gotten better at managing risk. Edison shares are trading at about 13 times estimated 2023 earnings, a discount to peers and the market, though earnings are expected to grow about 6% a year on average for the next few years. It also pays a hefty dividend.
entergy
| Data key | |
|---|---|
| Heart | ETR |
| recent price | $111.06 |
| Change year to date | -1% |
| P/E ratio | 16.7x |
| Dividend yield | 3.60% |
Source: Bloomberg
For investors interested in security,
entergy
(ETR) is as defensive as it gets, with about 85% of sales coming from regulated utility operations in Arkansas, Louisiana, Mississippi and Texas. Wall Street projects earnings growth of about 7% a year on average for the next few years, up from 6% previously. Following hurricanes and storms in 2020 and 2021, Entergy is asking regulators to approve $15 billion in grid resiliency spending, which would provide customers with more reliable power and allow the utility to earn a return on the capital spent, making it a “win-win”. for the company and its customers,” writes Paul Fremont, an analyst at Mizhuo. His target price is $123 per share, about 12% above recent levels.
exon
| Data key | |
|---|---|
| Heart | EXC |
| recent price | $44.46 |
| Change year to date | 8% |
| P/E ratio | 18.4x |
| Dividend yield | 3% |
Source: Bloomberg
Stability is worth a lot to a utility, just ask the Chicago-based company
exon
(EXC). Unregulated energy supplier emerged
constellation energy
(CEG) earlier this year, and that made all the difference. Before the spin-off, earnings fluctuated from year to year, with shares trading at just 12 times earnings. With Constellation gone, earnings are more stable and are expected to grow 7% annually through 2025, while the stock makes about 18 times earnings. Exelon may also begin to focus on improving its power transmission business using money that would have gone to Constellation. “Now that it’s over, the utility has better credit metrics, a higher value stock,” says Rhame.
creep energy
| Data key | |
|---|---|
| Heart | FLNC |
| recent price | $10.01 |
| Change year to date | -72% |
| P/E ratio | N/A |
| Dividend yield | N/A |
N/A=not applicable
Source: Bloomberg
For those who want a little risk with their utility investments, there are
creep energy
(FLNC). The company, a joint venture between AES and
Siemens
(SIE.Germany), sells battery storage, services and software for renewable energy generation. It was made public in October at $28, but started falling when the Fed first hinted at higher rates in November. Still, battery storage is one of the pillars of a sustainable energy future, enabling reliable power even when the sun isn’t shining and the wind isn’t blowing.
Canaccord Genuity
analyst George Gianarikas 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.
NextEra Energy
| Data key | |
|---|---|
| Heart | SINGLE |
| recent price | $80.38 |
| Change year to date | -14% |
| P/E ratio | 26x |
| Dividend yield | 2.10% |
Source: Bloomberg
NextEra Energy
(NEE), the largest utility in the S&P 500 and a leader in renewable energy, has benefited from moving to Florida, where it generates most of its revenue. But stocks have been volatile recently, due to a Commerce Department investigation into solar power imports that would have resulted in fewer panels available to finish its projects. Those issues appear to be behind us, at least for now, and NextEra just posted a strong second-quarter earnings report. The stock isn’t cheap — it’s trading at 26 times 2023 earnings, expensive even for a utility — but it has a reputation for being a quality trader and earnings have grown about 8% a year on average over the last few years. last five years.
write to To Root at [email protected]