5 Utility Stocks to Buy for an Extra-Durable Portfolio in 2018

5 Utility Stocks to Buy for an Extra-Durable PortfolioPosted on Wednesday, September 12th, 2018 by MarketBeat Staff

Utility stocks have been behaving erratically lately. Ever since the market took off at the end of 2017, the conventional wisdom said that utility stocks would be the victim of rising interest rates and higher inflation. As investors know, high-interest rates can make utility stocks less attractive. Stock prices of utility companies started to fall in November 2017 and a popular utility stock index fund, the Utilities Select SPDR Fund (XLU) is down 11% since November. In contrast, the S&P 500 Index has climbed 4% in that same time period.

However, it may be time to change the thinking. While interest rates are rising, and it appears that they will continue to do so, the Federal Reserve has given no indication that the pace of those increases will take place at anything other than their current measured pace. This is good news for utility stocks because it means that much of the interest rate increase is already priced into the stock.

The other concern for utility stocks, inflation, is telling a different story. Call it the Amazon effect, but the innovation and the increasing footprint of technology companies are helping to suppress inflationary pressures. If inflation remains relatively contained, it will keep interest rates in check. Both are positive signals for utility stocks.

So if it’s time to get back into utility stocks, what are the best stocks to buy right now? That’s the focus of this presentation. We’re giving you five of our top picks of utility stocks that you should consider for your portfolio.

#1 - NextEra Energy (NYSE:NEE)

NextEra Energy logo

NextEra Energy (NYSE: NEE) - Renewable energy is here to stay. So when you look at utility stocks, the companies that are generating revenue from renewable energy, as well as traditional utility services, are smart plays. That's the case with NextEra Energy. Based just by market cap, NextEra is the largest electric utility in the United States. One of the reasons for that is the company has two distinct business units. The first is a traditional utility, Florida Power & Light. The utility services south Florida, which continues to be one of the fastest growing population centers in the country. In fact, NextEra services a customer base that numbers over 5 million.

But what should also get investors excited is their subsidiary, NextEra Energy Resources that builds and operates solar energy and wind farms. As more states mandate more of their power come from renewable sources, NextEra stands to profit. In fact, NextEra Energy Resources accounts for nearly 50% of the company’s overall business.

Over the last ten years, NextEra has managed to increase earnings and dividends at a rate of approximately 8% per year. One analyst sees this trend continuing and is forecasting NextEra Energy to generate 6%-8% annual earnings growth over the next five years. The stock is up nearly 15% year-over-year and it’s P/E ratio of 13.83, is consistent with their position as a category leader. The dividend yield is currently around 2.58%, the lowest it’s been in five years. However, with an expectation of continued robust earnings, investors shouldn’t let a modest dividend scare them away.

About NextEra Energy
NextEra Energy, Inc., through its subsidiaries, generates, transmits, distributes, and sells electric power to retail and wholesale customers in North America. The company generates electricity through wind, solar, nuclear, and natural gas-fired facilities. It also provides risk management services related to power and gas consumption. As of February 16, 2018, the company operated approximately 46,790 megawatts of net generating capacity. As of December 31, 2017, it served approximately 10 million people through approximately 5 million customer accounts in the east and lower west coasts of Florida with approximately 75,000 circuit miles of transmission and distribution lines and approximately 620 substations. The company was formerly known as FPL Group, Inc. and changed its name to NextEra Energy, Inc. in 2010. NextEra Energy, Inc. was founded in 1925 and is headquartered in Juno Beach, Florida.

Current Price: $179.18
Consensus Rating: Buy
Ratings Breakdown: 10 Buy Ratings, 3 Hold Ratings, 0 Sell Ratings.
Consensus Price Target: $173.0833 (-3.4% Upside)

#2 - Duke Energy (NYSE:DUK)

Duke Energy logo

Duke Energy (NYSE: DUK) - Duke Energy is an example of why location matters. DUK’s primary markets are Central Florida and the Carolinas, two states that have a supportive regulatory environment. Plus, both states are showing strong residential customer growth of around 1.5%, giving them a growing base for their services. In Florida in particular, the company services the fast-growing cities of Tampa and Orlando. The combination of a growing economy and a recent string of unusually warm weather are causing revenue and earnings to climb at a slow, stable pace. Provided there is no softening in the economy, analysts foresee their growth trend continuing.

But an attractive service area is only part of the story. Duke is making a huge investment in its electrical grid and natural gas infrastructure, to the tune of $42 billion. This is news to investors ears as an investment like this will help support its annual earnings growth, which is currently around 6%. As part of this capital spending plan, Duke will put some money into its small renewable energy business.

Like the utility index, Duke’s stock is down about 10% since November, but the stock is up over 10% since hitting its 52-week low in June. One of the most attractive features of owning stock in Duke is its 4.5% dividend yield which is among the highest of all its competitors. Historically a yield above 4% means DUK still has room to rise.

About Duke Energy
Duke Energy Corporation, together with its subsidiaries, operates as an energy company in the United States. It operates through three segments: Electric Utilities and Infrastructure, Gas Utilities and Infrastructure, and Commercial Renewables. The Electric Utilities and Infrastructure segment generates, transmits, distributes, and sells electricity in the Carolinas, Florida, and the Midwest; uses coal, hydroelectric, natural gas, oil, renewable sources, and nuclear fuel to generate electricity; and engages in the wholesale of electricity to municipalities, electric cooperative utilities, and other load-serving entities. This segment serves approximately 7.6 million retail electric customers in 6 states in the Southeast and Midwest regions of the United States covering a service territory of approximately 95,000 square miles; and owns approximately 49,506 megawatts (MW) of generation capacity. The Gas Utilities and Infrastructure segment distributes natural gas to residential, commercial, industrial, and power generation natural gas customers; and owns, operates, and invests in various pipeline transmission and natural gas storage facilities. It has approximately 1.5 million customers, including 1 million customers located in North Carolina, South Carolina, and Tennessee, as well as 526,000 customers located in southwestern Ohio and northern Kentucky. The Commercial Renewables segment acquires, builds, develops, and operates wind and solar renewable generation projects, including nonregulated renewable energy and energy storage services to utilities, electric cooperatives, municipalities, and commercial and industrial customers. This segment has 21 wind and 63 solar facilities with a capacity of 2,907 MW across 14 states. The company was formerly known as Duke Energy Holding Corp. and changed its name to Duke Energy Corporation in April 2005. Duke Energy Corporation is headquartered in Charlotte, North Carolina.

Current Price: $86.14
Consensus Rating: Hold
Ratings Breakdown: 8 Buy Ratings, 6 Hold Ratings, 1 Sell Ratings.
Consensus Price Target: $83.6667 (-2.9% Upside)

#3 - Dominion Energy Inc. (NYSE:D)

Dominion Energy logo

Dominion Energy Inc. (NYSE: D) - Unlike our first two companies, Dominion faces a couple of challenges, but when you’re looking for a company that generates a high dividend yield, few utilities can match what Dominion Energy brings to the table. Dominion has a large service area in the eastern United States and is one of the most diversified utilities with separate operations for electric transmission, regulated and non-regulated power generation and natural gas delivery and transmission through its controlled limited partnership, Dominion Energy Midstream Partners LP.

Similar to other utility companies, Dominion is planning robust capital expenditures to the tune of $4.2 billion per year across all its business categories. By creating more generating capacity, the part of their power generation that is regulated should increase helping to fuel the company’s projections of 6-8% annualized earnings growth through 2020.

While investors may love the current 4.63% dividend yield, it comes at a price. The company was expecting to sell off the assets of their controlled partnership but has had to step back from this plan. This is making some analysts concerned about their growth which will have to come from increased debt or from the sale of equity. Another concern is their potential acquisition of SCANA Corporation. While growth through acquisition is not uncommon in this sector, it would leave Dominion with the responsibility for cleaning up SCANA's failed nuclear power plant construction projects.

Dominion is still calling for dividend growth of up to 10% per year through 2020. That may ease concerns about short-term earnings pressure.

About Dominion Energy
Dominion Energy, Inc. produces and transports energy in the United States. The company's Power Delivery segment engages in the regulated electric transmission and distribution operations that serve residential, commercial, industrial, and governmental customers in Virginia and North Carolina. Its Power Generation segment is involved in the electricity generation activities through gas, coal, nuclear, oil, renewables, biomass, hydro, solar, and power purchase agreements; and related energy supply operations. It also comprises generation operations of the company's merchant fleet and energy marketing, and price risk management activities for its assets. The company's Gas Infrastructure segment engages in the regulated natural gas distribution, gas transmission pipeline and storage, liquefied natural gas, and nonregulated retail natural gas marketing operations, as well as natural gas gathering and processing activities. This segment serves residential, commercial, and industrial customers. As of December 31, 2017, the company's portfolio of assets included approximately 26,000 megawatts of generating capacity; 6,600 miles of electric transmission lines; 57,900 miles of electric distribution lines; 14,800 miles of natural gas transmission, gathering, and storage pipelines; and 51,800 miles of gas distribution pipelines. It served approximately 6 million utility and retail energy customers; and operated underground natural gas storage systems with approximately 1 trillion cubic feet of storage capacity. In addition, Dominion Energy, Inc. sells electricity at wholesale prices to rural electric cooperatives, municipalities, and into wholesale electricity markets. The company was formerly known as Dominion Resources, Inc. and changed its name to Dominion Energy, Inc. in May 2017. Dominion Energy, Inc. was founded in 1909 and is headquartered in Richmond, Virginia.

Current Price: $73.45
Consensus Rating: Buy
Ratings Breakdown: 6 Buy Ratings, 6 Hold Ratings, 0 Sell Ratings.
Consensus Price Target: $84.7273 (15.4% Upside)

#4 - American Electric Power (NYSE:AEP)

American Electric Power logo

American Electric Power (NYSE: AEP) - You've probably noticed a theme. When it comes to utility stocks, bigger is better. And few utility companies cast as large a footprint as American Electric Power (AEP). The company operates across eleven states and services five million customers.

Make no mistake about it; AEP generates most of their revenue comes from their core business of generating power. With 26 gigawatts of power generation assets and 40,000 miles of transmission lines, they are a huge utility. But the company is making strides to adapt to the changing industry. They are reducing their reliance on coal for its power capacity. It’s currently around 50% (down from 70% in 2005) and they are working down to a low of 33%. They are also working to increase their renewable power base and have made impressive strides. Since 2005, they have tripled their renewable base from a minuscule 4% to 13%. This is one of their largest opportunities for growth and that is reflected in the company's future plans which include plans for 5.3 gigawatts of wind turbines and 3.1 gigawatts of solar construction through 2030.

One of the ways AEP is facilitating this plan is by selling assets. This shifting portfolio is lending support to the company’s projections for annual earnings growth in the range of 5-7%. With a share price around $73, AEP has largely recovered from the broad utility sell-off in November. The current dividend yield is around 3.3%, the stock still is showing room for growth.

About American Electric Power
American Electric Power Company, Inc., an electric public utility holding company, engages in the generation, transmission, and distribution of electricity for sale to retail and wholesale customers in the United States. The company generates electricity using coal and lignite, natural gas, nuclear, hydroelectric, solar, wind, and other energy sources. It also supplies and markets electric power at wholesale to other electric utility companies, rural electric cooperatives, municipalities, and other market participants. The company owns, leases, or controls approximately 3,675 railcars, 468 barges, 11 towboats, and a coal handling terminal with approximately 18 million tons of annual capacity. American Electric Power Company, Inc. was founded in 1906 and is headquartered in Columbus, Ohio.

Current Price: $76.79
Consensus Rating: Buy
Ratings Breakdown: 13 Buy Ratings, 4 Hold Ratings, 0 Sell Ratings.
Consensus Price Target: $75.7813 (-1.3% Upside)

#5 - American Water Works Company (NYSE:AWK)

American Water Works logo

American Water Works Company (NYSE: AWK) - Just like every community needs power, they also need water. American Water Works is one of the largest utilities in this area. They provide drinking water and wastewater services to 1,600 communities in the United States and parts of Canada, making them the largest and most diverse publicly traded water company. And they are looking to make a large investment to upgrade their infrastructure which should make regulators happy and drive their long-term earnings growth. Some analysts are projecting that growth to be around 7%.

Another area that is driving their growth is acquisition. The company only operates in 16 states so there is a large opportunity to expand. These strategic acquisitions are forecast to add as much as two percentage points to the company’s earnings growth.

Add it all together and you have a company that’s projected to have earnings growth of around 10%. Does that make up for a dividend that is currently around 2%? Maybe, then again maybe not. But with its dominant footprint in this highly fragmented category, AWK looks like a solid investment.

About American Water Works
American Water Works Company, Inc., through its subsidiaries, provides water and wastewater services in the United States and Canada. It offers water and wastewater services to approximately 1,600 communities in 16 states. The company operates approximately 72 surface water treatment plants; 527 groundwater treatment plants; 8 combined treatment plants; 127 wastewater treatment plants; 50,382 miles of transmission, distribution, and collection mains and pipes; 1,103 groundwater wells; 1,428 water and wastewater pumping stations; 1,313 treated water storage facilities; and 80 dams. It also undertakes contracts with the United States government to provide water and wastewater services on various military bases; and municipal, commercial, and industrial customers, primarily to operate and manage water and wastewater facilities, as well as provide other related services. In addition, the company provides warranty-type services to homeowners and smaller commercial customers to protect against the cost of repairing broken or leaking water pipes or clogged or blocked sewer pipes, interior electric lines, heating and cooling systems, and water heaters, as well as power surge protection and other related services; and water sourcing, transfer services, pipeline construction, and water storage solutions for natural gas exploration and production companies. Further, it supplies water to public fire hydrants for firefighting purposes, and private fire customers for use in fire suppression systems in office buildings and other facilities, as well as to other water utilities and community water systems. The company serves approximately 15 million people with drinking water, wastewater, and other water-related services in 46 states; the District of Columbia; and Ontario, Canada. The company was founded in 1886 and is based in Voorhees, New Jersey.

Current Price: $92.08
Consensus Rating: Buy
Ratings Breakdown: 6 Buy Ratings, 4 Hold Ratings, 0 Sell Ratings.
Consensus Price Target: $89.5722 (-2.7% Upside)

There are many reasons for investors not to buy into the narrative that buying utility stocks will harm their portfolio:

To begin with, interest rates are increasing, but the growth is measured and investors’ fears may be overblown. That’s because inflation is showing to be largely toothless which means there’s no imminent pressure for the Federal Reserve to raise rates beyond the measured, telegraphed way in which they have been operating. And historically, if both interest rates and inflation were to increase, regulators will usually allow utility companies to charge higher rates particularly for companies that are in highly populous areas.

Second, utility stocks are coming off a sell-off and are undervalued. Given that U.S. Treasury yields are between 2.5%-3%, utility stocks should be trading at levels above the S&P 500. They are trading at a pretty sharp discount so there's room for utility stocks to grow.

Third, even if the economy were to take a downturn, utility stocks have always been a good defense against bear markets. Having utility stocks in your portfolio will provide an opportunity for growth in any economy.

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