This article was coproduced with Chuck Walston.
My love for playing Monopoly as a kid is what initially makes me averse to owning utilities. Landing on the Electric Company or Water Works wasn’t exactly thrilling, nor was the prospect of collecting modest rent. However, times have changed and so has my perspective on this sector.
Why Now?
Historically, utilities were deemed slow-growing businesses with moderate dividend growth rates. However, the current environment offers compelling valuations for top-notch utilities with solid growth prospects and reasonable dividend growth. American Water Works CEO Susan Hardwick sums up the allure of this sector amidst higher interest rates, stating that history has shown compelling value for investors over medium- and longer-term horizons.
American Water Works: Weathering the Storm
American Water Works Company, Inc. (AWK), the largest publicly traded water and wastewater utility in the U.S., isn’t letting the tides wash away its potential for growth. Last quarter, AWK completed four acquisitions, bringing the firm’s total acquisitions year-to-date to fourteen. With another 32 acquisitions under agreement, AWS is projected to achieve long-term EPS and dividend growth rates between 7% to 9%. Despite the recent pounding its share price has taken, AWS has outperformed the S&P 500’s total return and boasts a dividend that has grown at a near 10% pace over the last five years. With a current yield of 2.14% and a payout ratio of 56.54%, AWS’s dividend is both safe and likely to continue on a robust growth trajectory. Furthermore, AWK’s debt is rated A by S&P and Baa1 by Moody’s, solidifying its standing in the sector.
WEC Energy Group: Powering up for Growth
WEC Energy Group, Inc. (WEC), the largest Midwest utility, serves 4.7 million utility customers across several states. With a sterling track record of meeting and surpassing earnings guidance, WEC projects annual earnings growth in a range of 6.5% to 7% through 2028. The company is poised to experience significant growth derived from a “massive data center expansion” and a $23.4 billion capital investment plan, up 17% from its previous plan. With projects like new solar, battery storage, and wind generation, totaling 3.8 gigawatts of additional generation capacity, WEC is positioning itself for sustained growth. Moreover, the company is taking steps to shut down 1,400 MW of coal-powered plants, showing its commitment to cleaner energy production.
