The Zacks Utility – Electric Power industry stocks have been transitioning toward clean sources of fuel and focusing on lower carbon emissions. The support from the government is aiding the industry’s transition toward clean energy sources to produce electricity. Utilities are also focused on strengthening the grid as well as transmission and distribution infrastructure. The huge infrastructure of the utilities faces the impact of the hurricane season each year. Infrastructure enhancement around the year increases the resilience of the entire system, reduces outages and allows operators to restore power quickly for customers affected by storms.
NextEra Energy Inc. NEE, with its expanding clean power generation portfolio and customer base, renewable operations and well-chalked-out capital investments to strengthen infrastructure, offers an excellent opportunity to stay invested in the utility space. Other utilities worth adding to your portfolio are Consolidated Edison Inc. ED, EverSource Energy ES and CenterPoint Energy Inc. CNP.
About the Industry
The Utility – Electric Power industry involves the generation, transmission, distribution, storage and sale of electricity to customers. A substantial portion of utilities’ earnings is generated from regulated operations. Unless there is any major weather variation, demand for the services provided by utilities remains steady, regardless of economic cycles. A very hot summer and cold winter season increases demand for electricity. A clear transition is evident in this industry, with more companies declaring zero-emission goals. Research and development over the years have resulted in a substantial decline in the cost of setting up utility-scale renewable power projects, aiding in reducing emissions. However, still-high interest rates are a headwind for capital-intensive utilities.
3 Electric Power Industry Trends in Focus
Transition Toward Cleaner Sources to Generate Power: The operators in the U.S. electric power sector are gradually moving toward cleaner sources of energy. Per the U.S. Energy Information Administration (EIA), the annual share of U.S. electricity generation from renewable energy sources will rise from 23% in 2023 to 24% in 2024 and touch 25% in 2025 as a result of the continuing addition of solar and wind-generating capacity. The passage of the Inflation Reduction Act (IRA) will support and accelerate the utilities’ transition toward clean energy sources. It has removed the uncertainties relating to federal incentives provided for the use of renewable sources. The act entails an opportunity for a wide range of low-cost clean energy solutions in a predictable way for a long time and will create earnings visibility.
Demand and Price for Electricity: Per EIA, electricity supply volumes in the United States will increase 3% in 2024 from the 2023 level. A major portion of the electricity will be generated from clean energy sources. EIA predicts the price of electricity to U.S. residential customers in 2024 to average 15.87 cents per kWh, about 0.7% lower than the 2023 level. The decline in input costs is likely to be passed on to residential customers. EIA expects retail electricity prices in the commercial and industrial sectors to drop in 2024. The drop in expected energy prices in the near term will adversely impact the prospects of the utilities.
Still-high Interest Rate a Headwind: Utilities, in order to maintain, upgrade and expand operations, approach capital markets for loans as the funds generated from internal sources are not always sufficient. The utilities have been enjoying near-zero interest rates for the past few years. Multiple rate hikes by the Federal Reserve took the benchmark rate to the 5.25-5.50% range, which impacted utility operators. However, in its last five meetings, the Fed did not increase the benchmark rate. The current high interest rates will continue to adversely impact the utilities. The utility operators who are planning to invest large amounts in infrastructure upgrades and add renewable sources of energy to produce clean electricity will have to borrow funds at a higher rate, which will increase the overall costs of the long-term projects.
Zacks Industry Rank Indicates Dull Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates weak near-term prospects. The 58-stock Utility-Electric Power industry is housed within the broader Zacks Utilities sector and currently carries a Zacks Industry Rank #151, which places it in the bottom 40% of more than 251 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Since March 2023, the industry’s earnings estimate for 2024 has gone down by 22.5%.
Before we present a few Utility - Electric Power stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and current valuation.
Industry Lags S&P 500 But Beats Sector
The Utility Electric Power industry has lagged the Zacks S&P 500 but outperformed its own sector over the past 12 months. The industry has declined 0.4% compared with its sector’s decrease of 0.8%. The Zacks S&P 500 composite has gained 32.6% in the same period.
Price Performance (One year)
Industry's Current Valuation
On the basis of EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) TTM, which is a commonly used multiple for valuing Utility Electric Power companies, the industry is trading at 12.45X compared with the S&P 500’s 14.92X and the Utility sector’s 14X.
Over the past five years, the industry has traded as high as 20.83X, as low as 10.45X and at the median of 14.43X.
Industry EV/EBITDA TTM vs S&P 500 (5yrs)
Industry EV/EBITDA TTM vs Sector (5yrs)
4 Electric Power Industry Stocks to Watch
Utilities is a mature sector and all the stocks selected from the Zacks Utility Electric Power industry have a market capitalization of more than $20 billion. One stock currently has a Zacks Rank #2 (Buy) and the other three have a Zacks Rank #3 (Hold) each. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
NextEra Energy: Juno Beach, FL-based NextEra Energy is engaged in the generation, transmission, distribution and sale of electric energy. The company has a well-chalked-out capital deployment plan, which will be directed toward modernizing and strengthening the existing infrastructure and generating more electricity from clean sources to lower carbon emissions. The company has plans to invest more than $60 billion in the 2024-2028 time frame to further strengthen its operations. NEE’s long-term earnings growth is pegged at 8.18%. The current dividend yield for NEE is 3.36%, which is better than the Zacks S&P 500 composite’s yield of 1.59%. The Zacks Consensus Estimate for NextEra Energy’s 2024 earnings per share has risen 1.5% in the past 60 days. NextEra Energy currently has a Zacks Rank #2.
Price and Consensus: NEE
Consolidated Edison: New York-based Consolidated Edison, through its subsidiaries, is engaged in regulated electric, gas and steam delivery businesses. The company has a capital expenditure plan of $72 billion for the next 10 years. ED’s current dividend yield is 3.7%. ED’s long-term earnings growth is pegged at 2%. The Zacks Consensus Estimate for Consolidated Edison’s 2024 earnings per share has moved north by 1.5% in the past 60 days. Consolidated Edison currently has a Zacks Rank #3.
Price and Consensus: ED
Eversource Energy: This utility transmits and delivers electricity and natural gas to residential, commercial and industrial customers. The company also provides water services. The company plans a capital investment of $23.1 billion for the 2024-2028 period, out of which it intends to invest nearly $16.1 billion in electric and natural gas distribution networks and $7.2 billion in the electric transmission segment. ES’ long-term earnings growth is pegged at 4.16%. ES’ current dividend yield is 4.86%. The Zacks Consensus Estimate for Eversource Energy’s 2024 earnings per share has risen 0.2% in the past 30 days. Eversource Energy currently has a Zacks Rank #3.
Price and Consensus: ES
CenterPoint Energy: Houston, TX-based CenterPoint Energy provides electric transmission & distribution, natural gas distribution and competitive natural gas sales and services operations. CenterPoint Energy is investing to expand its operations to meet increasing electricity demand, backed by expanding commercial activity. In the next 10 years, the company plans to invest $44.5 billion to strengthen and expand its operation further. CNP’s current dividend yield is 2.8%. The Zacks Consensus Estimate for CenterPoint Energy’s 2024 earnings has moved up 0.6% in the past 60 days CNP’s long-term earnings growth is pegged at 7.51%. CenterPoint Energy currently has a Zacks Rank #3.
Price and Consensus: CNP
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