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.
The Ever-Shifting Landscape of Energy Giants
Moving toward sustainable energy solutions, WEC Energy Group (WEC) recently announced plans to retire its less-efficient natural gas generation facilities. This strategic shift underscores the ongoing evolution of energy companies in response to changing demands and global environmental concerns.
WEC Energy Group’s Green Transition
As part of its forward-thinking measures, WEC aims to close its less-efficient natural gas generation facilities, signaling a proficiency in adapting to a fast-changing industry environment. This move not only demonstrates corporate responsibility but also aligns with the shifting global focus on sustainable energy sources.
NextEra Energy: Higher Risk, Higher Reward?
NextEra Energy, Inc. (NEE), valued at $125 billion, stands as the largest utility in the U.S., consolidating its position as an industry leader. The company’s dominance extends to its ownership of NextEra Energy Resources (“NEER”), solidifying its reputation as the world’s largest producer of wind and solar energy, along with trailblazing advancements in battery storage technology.
NextEra’s proactive stance in diversifying its energy generation has proven advantageous. The company’s decision to fortify its renewable energy portfolio has led to a substantial reduction in electricity generation costs, with a compound adjusted EPS growth rate of 9.8% since 2012, outshining most industry peers.
Operating NEER and Florida Power & Light (“FPL”), NextEra capitalizes on a robust revenue mix while strategically positioning itself in the vanguard of the renewable energy revolution. With 70 gigawatts of power generation, 34 GW derived from renewable sources, and a strong focus on wind and solar power, the company sets the bar high for its competitors.
Despite navigating some recent challenges affecting its stock value, NextEra Energy stands resilient, exemplifying its commitment to driving sustainable energy solutions in the utility sector with unwavering determination.
Summation
Utilities hold the intriguing paradox of being monopolies in their designated areas, thriving under the guidance of government regulations. Although this may imply slower growth, it also cements utilities as dependable investment options. Companies like WEC, NextEra, and others mentioned, stand as testament to this reliability, with strides in innovation pushing the boundaries and paving the way for a greener, more efficient energy landscape.
Investors can find reassurance in the investment grade debt and robust growth histories of these companies. They are currently trading at attractive valuations, offering promising potential for those seeking long-term stability and sustainable dividends.
I rate each of the companies as a BUY.
The evolving nature of the energy sector and the pioneering advances made by companies like WEC Energy Group and NextEra Energy underscore the momentous transition toward sustainable, renewable energy solutions.
Author’s note: Brad Thomas is a Wall Street writer, which means he’s not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.
