Best Utility Stocks To Buy Now
Utilities have been showing above average earnings growth
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When investing, you could look toward something hot, trendy and of the moment. And you can score a win at times. But the best way for most investors to gain value is regular investment in solid companies that will perform year after year and keep a long-term perspective.
Here’s something Warren Buffett wrote in his most recent letter to Berkshire Hathaway BRK.B BRK.B shareholders: “Over the years, I have made many mistakes. Consequently, our extensive collection of businesses currently consists of a few enterprises that have truly extraordinary economics, many that enjoy very good economic characteristics and a large group that are marginal. Along the way, other businesses in which I have invested have died, their products unwanted by the public.”
One area in which Berkshire Hathaway has heavily invested for a long time is utilities. People and companies continue to need power, heat, water and waste disposal. That doesn’t necessarily mean staid.
For example, energy utilities include electrical power and natural gas, but also renewables like wind and solar. According to Timothy Winter, portfolio manager at Gabelli Funds, it’s an especially good time for utilities. “Utilities are growing earnings at stronger than historical rates (5%-7% versus 3%-4%) as they continue to ramp up investment to transform from fossil fuel to clean energy,” he says. “This requires new wind, solar and battery storage as well as other new technologies (green hydrogen, carbon capture), upgraded transmission to move power around and handle intermittent wind/solar, upgrade distribution for solar panel, EV charging and electrification.” The businesses that provide utilities have a good chance at longevity and profitability, with not only share prices to provide a lift, but dividend yields.
Here are some utility stocks and exchange-traded funds to consider this year. With inflation at a 40-year high running at more than 6%, dividend stocks offer one of the best ways to beat inflation and generate a dependable income stream. Download “Five Dividend Stocks To Beat Inflation,” a special report from Forbes.
AES (AES)
Solar energy and wind power stations
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This Fortune 500 U.S. energy and power utility company gets a nod from two sources: Mitch Bodenmiller, portfolio manager and research analyst for Buckingham Advisors, and Todd Shaffer, manager of research at VectorVest.
“With forecast earnings growth at 16%, we see good upside potential with above average safety,” Shaffer says. “An earnings yield of 6.4% supports a 2.6% dividend yield with earnings growth projected to outpace dividend growth.” “AES is guiding for growth of its U.S. utilities at a combined rate basis of 9% annually through 2025,” Bodenmiller says. “The company reaffirmed long-term growth rate of 7% to 9%, a rate that is much higher than many utility peers.” He also notes that shares trade at a forward P/E of 14.5, which “appears attractive” and, while the dividend yield of 2.6% is below the sector average of 3.1%, it is “still attractive relative to the overall market.” With an annual free cash flow of about £1 billion, the £20 billion of net debt “should not pose any issues.”
Avangrid (AGR)
An energy services holding company, Avangrid operates in 24 states with dual core business lines: networks, which includes delivery of electricity and natural gas, and renewables, mostly in wind generation. “Given a P/E [price to earnings] ratio around 17 and a dividend yield hovering at 4.5%, there’s not much to dislike about AGR,” says Angelo DeCandia, a professor of business at Touro University. “And it comes with diversification, both geographic and scientific.”
It isn’t the largest utility, “but the hefty dividend delivered at an attractive P/E ratio make it worth consideration,” DeCandia adds. “Value-minded investors should note, however, that the PEG ratio for this company is quite high (4.5), a number that demands a second look. But with a debt ratio just shy of 23%, quite low for this infrastructure-heavy industry, investors may decide that AGR is worth the risk. Other factors to consider are its beta (a measure of volatility compared to the market at large with values greater than 1 being more volatile than the market) of only 0.4, a clear indication that this stock marches to its own drum.
One other red flag may be the fairly low institutional interest of only 13%. The investor drawn to that hefty dividend yield will have to be confident in their own analysis and decision-making.”
Brookfield Infrastructure Partners (BIP)
Brookfield wind farm
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Brookfield is in the infrastructure business, globally acquiring assets and then managing them. Of its four business sectors, one is utilities. “It has a demonstrated ability to effectively identify countercyclical, underperforming assets at compelling prices, improve the assets, and sell on for high ROI,” says Nick Szucs, an equities analyst with Leith Wheeler Investment Counsel.
With inflation at a 40-year high running at more than 6%, dividend stocks offer one of the best ways to beat inflation and generate a dependable income stream.
Download “Five Dividend Stocks To Beat Inflation,” a special report from Forbes.
In addition, Szucs says that Brookfield “also possesses the rare ability to protect margins during high-inflation periods like the current one, due to contractual inflation indexation within their portfolio of assets (they even grew funds from operations per unit by 11% year over year in their most-recent quarter).” The company’s current backlog has hit a record £6.3 billion and claims that even better growth in the future is a good possibility. “Management is exceptional at this company, and as an asset class, the opportunity set in infrastructure will likely draw investor flows away from real estate funds in the near term.”
Clearway Energy (CWEN)
Asher Rogovy, chief investment officer for Magnifina, suggests Clearway because of “several measures indicative of a high-quality investment.”
“It appears very sensibly valued with a trailing P/E less than 6,” he continues. “Operating earnings are expected to grow by an annualized 17% for the next two years. On top of that, it pays a dividend around 5%. Their revenue has grown very consistently since 2014, with only a modest decline in 2019, while maintaining their operating margin.
They are not manipulating their cash flow numbers using non-cash compensation items which has become common in other industries. Clearway also focuses on cleaner energy, with about 2/3 of its assets in wind or solar. While we find quantitative ESG ratings extremely problematic, qualitative ethical investors may be attracted to these greener forms of energy.”
There is a risk factor, Rogovy adds, in the company’s debt. S&P Global Market Intelligence data shows the total debt to equity ratio for 2022 as 182.7%. “CWEN carries a lot of debt from infrastructure investments,” he says. “Higher rates may impair its ability to make these investments with the same profitability. CWEN could benefit significantly from a Fed pivot [to lower interest rates].
Nevertheless, this stock looks very attractive from a number of angles. It stands out in the utility sector which is known for safe and slow growing investments.”
Eaton (ETN)
“This leading power management company that sits at the center of some of the largest addressable markets within industrials, including EV, electric grid update, along with critical infrastructure investment,” says Scott Harrison, portfolio manager at Argent Capital Management. General electrification and energy transition away from petroleum plays to future expected growth.
He points to high margin potential with a minimum of low teens; long-term growth greater than real GDP; a repositioned portfolio of businesses to focus on markets that are less cyclical and both higher growth and margin; and return on tangible assets of in the mid-20s or more. “Eaton has paid a dividend every year since 1923 and has grown by 35% over the past five years,” Harrison says.
Enel [ENLAY]
You can get some significant geographic diversity with Enel, an integrated utility with large exposure to Italy and Spain where it operates power generation from both conventional and renewable sources, as well as distribution and supply. “After a challenging 2022, Enel is one of our top picks for 2023,” says Jean-Hugues de Lamaze, senior portfolio manager and managing director at alternative energy investment firm Ecofin. “Three main reasons support our investment thesis.” First are solid earnings with a compound annual growth rate of 7% from 2022 to 2025. “Market concerns over net debt will diminish as working capital normalizes and Enel’s disposal program helps bring leverage down below three times Ebitda.” Also, there’s margin expansion and lower bad debt risk in Enel’s retail business. “The company is currently trading at a deep discount to peers (9 times fiscal year 2023 earnings) and offers an attractive dividend yield of 8% (fiscal year 2023).”
NextEra Energy NEE NEE (NEE)
NextEra Energy has grown to be the largest utility in the world and consists of Florida Power and Light, which serves 65% of the state of Florida, and is the largest and most successful renewable developer and electric transmission owner,” says Gabelli’s Winter. There are competitive advantages from renewable development and big pipeline and benefits from the Inflation Reduction Act, with all the tax credits for renewable development, he notes.
“After 10 to 15 years of tremendous outperformance, the stock has been weak in 2022 and early 2023, which provides the buying opportunity to participate in two decades of growth,” Winter says. “We consider NEE to be the premier U.S. power company and renewable developer in a rapidly growing development market. Management targets an above-sector average 6%-to-8% earnings growth rate driven by contracted renewable development and constructive rate base growth. Shares offer a 2.3% current return on the £1.70 per share annual dividend (60% payout ratio vs.
65% target). They have significant competitive advantages to adding more wind, more solar, battery storage. They’re also going to be one of the bigger players in using green hydrogen.”
How to Determine Good Utility Stocks Investments
“Utility stocks have traditionally provided conservative investors with steady, decent returns with acceptable levels of risk,” says Angelo DeCandia, a professor of business at Touro University. “That remains true in 2023 but the game has changed a bit with the ongoing shift from petroleum to electric sources of energy and increased governmental mandates related to the environment.
These changes will provide new opportunities for investors willing to go outside the box, but it may also introduce new risks to those traditionally steady returns. Regardless, the savvy investor will continue to rely on steady cash flows that deliver timely dividends despite changes in the utility sector.”
Five Top Dividend Stocks to Beat Inflation
Many investors may not realize that since 1930, dividends have provided 40% of the stock markets total returns. And what is even lesser known is its outsized impact is even greater during inflationary years, an impressive 54% of shareholder gains.
If you’re looking to add high quality dividend stocks to hedge against inflation, Forbes’ investment team has found 5 companies with strong fundamentals to keep growing when prices are surging.
Download the report here.
