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All Contents © 2020The Kiplinger Washington Editors
By James Brumley, Contributing Writer
| November 9, 2017
To say utility stocks are less than interesting would be an understatement. Utilities are downright boring, trading almost like bonds because of their (usually) steady dividends. Growth – at least in comparison to the potential of technology or consumer discretionary stocks – just isn’t in the cards for this group, even though the current presidential administration is as energy-production-friendly as any in recent history.
But for some investors, boring can be beautiful – particularly when the goal is sleeping well at night and driving a little income.
Here’s a closer look at 15 of the utility sector’s top prospects for long-term investors. Whether it's ever-growing payouts, diverse sources of revenue or a stronghold on their respective markets, there’s plenty to like about all of them.
Data is as of Nov. 8, 2017. Stocks are listed in alphabetical order. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Click on ticker-symbol links in each slide for current share prices and more.
Market value: $15.2 billion
Dividend yield: 2.8%
Ameren (AEE, $62.66) is one of those utility companies that boasts a wide array of power plant types, ranging from coal to natural gas to nuclear to hydroelectric to renewables. All told, the company supplies roughly 3 million customers with natural gas, electricity or both in Illinois and Missouri.
With a $15 billion market capitalization, Ameren is neither too small to enjoy the benefits of scale nor too big to adapt as the business changes. It’s boring, but boring is exactly what some investors need.
It took a small crisis to get to this position. In 2009, Ameren – crimped by the Great Recession brought on by the collapse of the subprime mortgage market – was forced to cut its longstanding dividend of 63.5 cents per share to just 38.5 cents. The company has streamlined its business and is much more fiscally sound now, and has since pushed its quarterly payout back up to 44 cents – a much more affordable dividend that comes to roughly 60% of its trailing 12-month earnings.
Market value: $36.8 billion
Dividend yield: 3.3%
The general theory is, when an economy booms and interest rates rise, dividend-oriented utility stocks falter. That’s because yields on bonds and returns from more growth-focused stocks feel more appealing than the average utility stock’s potential. That hasn’t been the case for American Electric Power (AEP, $75.52).
The underlying reason why AEP and other utility stocks still are marching toward record highs when they theoretically shouldn’t can at least be partially attributed to an industrial renaissance. U.S. manufacturing is picking up again, and operating factories requires electricity that simply wasn’t being consumed just a few years ago.
American Electric Power also is capitalizing on the advent of clean power alternatives like wind, which now is cost-parity with some hydrocarbon sources. It’s also tapping technologies that facilitate better, cost-effective management of electricity once it’s generated.
“We are investing approximately $4.4 billion in the distribution systems at our regulated utility operating companies over the next three years and another $9 billion in our transmission businesses in the same period,” American Electric Power CEO Nick Akin said in a recent release explaining an $18.2 billion commitment to infrastructure and renewable energy sources. “By 2020, the contribution of our Transmission Holding Co. business to earnings will grow to a projected 96 to 99 cents per share, up from 16 cents per share in 2013.”
All told, these investments are expected to drive earnings growth of between 5% and 7%, setting the stage for more dividend growth.
Market value: $16 billion
Dividend yield: 1.9%
Most searches for “utility stocks” will start and end with companies that deliver electricity to people’s homes. Don’t stop there. While “the grid” has injected some competition into the electricity-generating industry (in that it can be redirected, and isn’t entirely limited by geography any longer), the water utility business isn’t nearly as competitive. Local governments typically must approve water utility rate increases, but such requests rarely are rejected because there’s little choice. Water prices have risen no less than 4% in 30 of the nation’s major cities every year since 2010, with these providers leveraging what is in effect, even if not legally, a monopoly.
Enter American Water Works (AWK, $90.24), which serves 15 million customers in 47 states through subsidiaries like Iowa American Water, California American Water and several other state-centric entities. The company’s top line has grown every year but one since 1990, and the quarterly dividend has jumped from 20 cents per share in 2009 to 41.5 cents currently.
A big chunk of that improvement – which is in step with earnings growth – can be chalked up to smart M&A and an efficient cost-cutting mindset. Look for more of the same going forward. As CEO Susan Story said during the most recent earnings conference call, “We believe that the water industry in general is a little behind the electric and gas from a technology standpoint. We have really ramped up our technology integration and we’ve got some very exciting projects going on.”
Market value: $15.7 billion
Dividend yield: 3.4%
Of all the utility names on the table, Avangrid (AGR, $51.15) is one of the least recognizable. Don’t let the unfamiliarity fool you. This is a nearly $16 billion organization doing business in 27 states, generating $6 billion in revenue per year selling and distributing electricity produced by natural gas and renewable sources. In fact, it’s the country’s second-biggest provider of wind-produced electricity.
Avangrid also is a very dividend-friendly outfit, presently yielding 3.4% on a quarterly dividend of 43.2 cents per share.
The “edge” Avangrid has on many of its competitors: It offers special deals to individual companies that end up being win-win scenarios. Last quarter, Avangrid signed a deal to provide 86 megawatts of power for an unnamed footwear and apparel maker. These one-off agreements collectively build a platform for reliable revenue, and are the shape of things to come.
Market value: $27.1 billion
Dividend yield: 3.1%
Consolidated Edison (ED, $87.86) serves 10 million customers in and around New York City. The market isn't going away, and the company enjoys a wide moat that keeps other players from successfully entering the market and posing a competitive threat. Although revenue has dwindled since peaking in 2008, income has edged higher that whole time. How does that happen?
“We’re incorporating renewables into the grid at an increasing rate, we’re using data analytics to provide customers with more information about the way they’re using energy and how they can save, and we’re working on programs to increase electric vehicle use and access to charging stations,” CEO John McAvoy said in the company’s most recent earnings report. “At the same time, our $1 billion storm hardening program after Superstorm Sandy has made our system more reliable than ever five years later, having already prevented 250,000 power outages due to our investments.”
Ergo, Consolidated Edison’s consistently rising quarterly dividend of 69 cents per share is well-protected, with Con Ed doing taking energy management, cost-savings and renewables about as well as any other utility provider does.
The echoes of a third-quarter earnings miss still are ringing. But as was the case with several utility stocks, the disappointing quarter wasn’t enough to send the stock lower. Investors knew a combination of storm-related expenses, volatile natural gas prices and the impact of last year’s sale of some of its clean energy businesses collectively made any Q3 estimates a difficult, “best guess” situation. Consolidated Edison still is a solid company.
Market value: $52 billion
Dividend yield: 3.8%
Dominion Energy (D, $80.88) does a little of everything. It generates electricity using natural gas and renewable sources, distributes natural gas and delivers electric power where it’s needed by redirecting it through 6,600 miles of power transmission lines peppered all throughout North Carolina and Virginia. It has operations in several states, in fact, including Idaho, Utah and Wyoming.
The business and geographic diversity is nice, but it’s not the most compelling reason to consider Dominion at this time. What’s exciting here is an above-average yield of 3.8% and a history of increasing that payout. The quarterly dividend of 40 cents per share that investors enjoyed 2008 has ramped up to 76 cents per quarter.
The kicker: Dominion Energy, like Avangrid, is getting good at offering customized, small-scale power solutions that could turn into very big opportunities in the aggregate. For instance, it recently offered a specially quoted rate to provide electricity to Facebook’s (FB) new data center in Virginia – powered exclusively by solar. The company can afford to do so because it has managed its renewable projects well and is taking advantage of recent efficiency breakthroughs in solar panel technologies.
Market value: $62.5 billion
Dividend yield: 4%
Not all of Duke Energy’s (DUK, $89.23) customers are located in coastal areas, but a wide swath of its 7.4 million customers do reside in Florida and the Carolinas. These markets are prone to the damage hurricanes can do, and hurricane Irma was a not-so-gentle reminder these storms can be a headache for the company. Last quarter, storm-related expenses shaved 3 cents per share off Duke’s profits. That doesn’t count the lost revenue stemming from 1.5 million of its customers being without power after Irma ripped through the nation’s southeastern seaboard in September.
However, this utility company isn’t a stranger to such shutdowns and knows how to minimize the impact. Moreover, that impact usually is baked into the stock’s price – even if investors forget that from time to time.
Duke Energy has paid out more than it has earned during the past four quarters, raising questions about the sustainability of its dividend. The company is taking measures to shield itself from such setbacks in the future, however – initiatives like investing in its South Carolina power grid that will lower costs as well as ensure fewer outages.
Market value: $20.5 billion
Dividend yield: 2.9%
If you want a picture of consistency, look no further than Eversource Energy (ES, $64.63), which provides electric and natural gas to the four most northeastern states in the country. The New England utility player has grown its income every year for the past decade, too, despite plenty of pitfalls put in its path.
The dividend has been just as consistent as the bottom line, if not more so. Eversource’s quarterly payout has grown every year since 2001, from 10 cents per share to 47.5 cents currently. That’s more than a quadrupling of the dividend – one of the best growth paces in the utility sector. The current yield of nearly 3%, however, may mean the market hasn’t fully priced in how much Eversource likes to grow its distributions.
Eversource can afford to share that wealth, too. The stock’s payout ratio has averaged around 60% of its net earnings for its past 10 years, leaving behind 40% of its profits to do whatever the company needs. That cushion also means Eversource can continue to make its usual dividend payments – even if the utility market gets a little tough.
Market value: $39.6 billion
Dividend yield: 3.2%
Exelon (EXC, $41.32) is another company that does a little of everything, and does it everywhere. It’s a utility provider in six markets, though it’s also an electricity wholesaler, tapping a myriad of nuclear, gas, wind, solar and hydroelectric power generation facilities. It’s also a natural gas player.
Income has been flat, and choppy, for Exelon since 2005 despite impressive top-line growth during that time. The bottom line could be turning the corner soon, however. As CEO Christopher Crane commented within the company’s most recent quarterly report, “We are encouraged by the U.S. Department of Energy’s recent support for proposed market reforms that would help preserve reliable, emissions-free nuclear energy for the benefit of our customers, environment and communities. We see an important first step coming through potential changes in energy price formation which could be implemented in PJM by mid-year 2018.”
In the meantime, the dividend is a few years removed from a cut meant to allow the utility to invest in growth. The payout was hacked from 52.5 cents to 31 cents, but has crept back up to 32.8 cents, and is plenty sustainable at this level.
Market value: $72.8 billion
Dividend yield: 2.5%
While 2017’s hurricane season was tough on AEP, Duke and several other utility companies, it was especially tough on Florida’s biggest power provider, NextEra Energy (NEE, $154.92). Damage done by Harvey and Irma will cost NextEra an estimated $1.5 billion. The next-biggest victim was Duke, with a storm-damage bill of only about $500 million.
On the surface, that would seem like a reason to pass on NextEra, as hurricanes have more or less become a way of life in that part of the country. They’ll never not be expensive. However, NextEra has storm response down to a fine science, and ultimately, the company’s customers eventually foot the bill for hurricane damage. That’s how NextEra has mustered a surprisingly stable track record of income growth since the 1990s despite several damaging hurricanes that have swept through its markets in that time.
True, NextEra’s 2.5% dividend yield isn’t exactly thrilling, but the company’s payout has grown more than 10% over the course of the past five years, which is more than twice the average growth rate among utility stocks.
Market value: $1.3 billion
Dividend yield: 5.7%
NRG Yield (NYLD, $19.55), and its sister NRG Energy (NRG), require a little explaining. While there are two tickers here, and two investments, there’s effectively just one company. NRG Energy is the owner of NRG Yield, which owns a diverse portfolio of renewable and natural gas operations. You can invest in either, though NYLD pays a healthy dividend yield of 6% while NRG barely pays one at all. That’s by design.
Investors should know that NRG Energy is aiming to divest itself of most if not all of NRG Yield, which is heavily focused on renewable energy production. That’s because hedge fund manager Paul Singer and activist investor Charles John Wilder are looking to simplify and shrink NRG Energy by shedding certain assets.
But the solar, wind and thermal projects that NRG Yield builds and operates are the ones well-suited to drive recurring, reliable dividends.
Market value: $30.4 billion
Dividend yield: 2.7%
If you want a little geographical diversity in your utility holdings, Sempra Energy (SRE, $121.03) has it. The company serves a wide swath of the southern California market, delivering electricity as well as natural gas. But it also operates utility businesses in Mexico, Chile and Peru.
Sempra also has some exposure to the liquefied natural gas market, and is wading deeper into renewables. In fact, its portfolio consists of 2,400 megawatts’ worth of power stemming from renewable energy sources.
Sempra’s revenue and income, while still broadly growing, haven’t been exactly even-keeled. That’s the nature of being in the relatively volatile natural gas business, with currency-exchange-rate fluctuation stirring the pot even further. However, with multiple profit centers on board, this $30 billion behemoth and its decent yield can muscle their way through most headwinds.
Dividend yield: 1.4%
SJW Group (SJW, $62.99) – better known as San Jose Water Company to its customers in San Jose, California – won’t come cheap. The company trades at 23.3 times trailing 12-month earnings and 24.7 times analysts’ estimates for next year’s profits. Those figures are expensive even by tech-stock standards, and are almost too frothy to nibble on by utility standards.
Thing is, SJW has traded at high valuations for years, edging higher the whole time. The stock, once you strip out the unusual benefits of a one-time gain, hasn’t traded below a P/E of 17.0 once in the past decade, yet has more than doubled in value since a 2015 low – in step with SJW’s earnings growth. The market simply isn’t bothered by the lofty valuation, knowing that like American Water Works, San Jose Water is almost assured to be able to impose rate hikes at will in the future.
SJW only yields 1.4%, which isn’t much. But the company isn’t shy about sharing its ever-increasing wealth. The current quarterly payout of 21.8 cents per share is twice what it was in the early 2000s – a huge increase for a utility company – and still on the rise. And SJW is only dishing out about a third of its profits in dividends, which is plenty of wiggle room.
Market value: $51.9 billion
Dividend yield: 4.5%
It’s possible you’re a Southern Company (SO, $51.77) without even realizing it. Southern operates more localized entities such as Mississippi Power, Alabama Power and even a telecom simply called Southern Telecom. All told, it serves 9 million customers, mostly in the southeastern part of the country, delivering power generated by a combination of solar, nuclear, natural gas and even coal plants.
Southern Company is a compelling way to add safety and certainty to a portfolio, but not just because of its diversity. The company offers a consistent dividend, as well as payout growth. This utility stock has not missed a quarterly payout since 1982, and it hasn’t failed to raise its payout since 2001.
And, unlike too many other income-oriented outfits, Southern can actually afford its dividend, which amounts to less than 80% of projected 2017 earnings. This is made possible largely because Southern and its subsidiaries are often the oldest and most established providers in their markets, and can operate leanly and efficiently.
Market value: $4.4 billion
Dividend yield: 2.4%
WGL Holdings (WGL, $85.62) is a name some of you know, even if you think you don’t know it. The company’s customers are familiar with it as subsidiary Washington Gas, serving the Washington, D.C., area for 160 years. It’s also the owner/operator of some pipelines, and through its subsidiaries and partnerships offers various business services in several states.
The natural gas business certainly has its ups and downs, with most of them being driven by the ever-changing price of gas. Over the long haul, though, WGL has managed to smooth this ebb and flow, logging a long-term uptrend in both revenues and earnings.
The current yield of 2.4% isn’t earth-shattering. What it lacks in pizzazz, however, it makes up for in progress. WGL’s dividend has grown every year since 1982, and has been paid in every quarter during that time.