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4 Stocks to Watch From the Thriving Electric Power Industry
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The Zacks Utility – Electric Power industry players generate and supply electricity to millions of customers across the United States. The utilities have been transitioning toward clean sources of fuel and focusing on carbon emissions reduction. 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 to customers affected by storms.
Xcel Energy (XEL - Free Report) , 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 DTE Energy Company (DTE - Free Report) , Evergy Inc.(EVRG - Free Report) and The AES Corporation (AES - Free Report) .
About The Industry
The Utility – Electric Power industry involves the generation, transmission, distribution, storage and sale of electricity to customers. A major 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. The increasing usage of the Internet globally and an expected increase in artificial intelligence (AI) in the future will create a rise in demand for electricity. AI-based queries need substantially higher power than traditional Internet searches, music and photos. Yet, 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 21% in 2023 to 23% 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) should 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 3.3% in 2024 from the 2023 level. A major portion of the electricity will be generated from clean energy sources. The development of large data centers in the United States is also increasing the electricity demand. Data centers now use 4% of the U.S. electricity load, per an Electric Power Research Institute (EPRI) report, data centers will consume between 4.6% and 9.1% of U.S. electricity by 2030. EIA predicts the price of electricity to U.S. residential customers in 2024 to average 16.16 cents per kWh, about 1.1% higher than the 2023 level and increase further in 2025 by 1.8% from the 2024 levels. New rates implemented are likely to have raised the rates year over year. EIA expects retail electricity prices in the commercial sectors to increase in 2024. The increase in electricity prices in the near term should favor 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, since the July 2023 increase, the Fed did not increase the benchmark rate. The current high interest rates will continue to adversely impact the utilities. Operators 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 cost of the long-term projects. Yet, there is a possibility of an interest rate decline before the end of 2024, which can act as a tailwind for the utilities.
Zacks Industry Rank Indicates Bright Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates upbeat near-term prospects. The 57-stock Utility-Electric Power industry is housed within the broader Zacks Utilities sector and currently carries a Zacks Industry Rank #65, which places it in the top 26% of more than 250 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate.
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.
Electric Power 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 gained 20.5% compared with its sector’s 18.7% rally. The Zacks S&P 500 composite has gained 24.2% in the same period.
Price Performance (One year)
Electric Power 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 14.76X compared with the S&P 500’s 18.56X and the Utility sector’s 15.53X.
Over the past five years, the industry has traded as high as 21.46X, as low as 11.06X and at the median of 15.32X.
Industry EV/EBITDA TTM vs S&P 500 (5yrs)
Industry EV/EBITDA TTM vs Sector (5yrs)
4 Electric Power Industry Stocks to Keep an Eye on
Utilities is a mature sector, and all the stocks selected from the Zacks Utility Electric Power industry have a market capitalization of more than $12 billion. All stocks currently have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.
Xcel Energy: Minneapolis, MN-based Xcel Energy provided electricity and natural gas to its customers. Xcel Energy’s operating utilities are engaged in the generation, purchase, transmission, distribution and sale of electricity in the United States. The company plans to invest $39 billion during the 2024-2028 period to strengthen its operations and efficiently serve its customers.
The current dividend yield of the company is 3.58% better than the Zacks S&P 500 Composite’s average of 1.54%. Long-term (three to five years) earnings growth is currently pegged at 6.39%. The Zacks Consensus Estimate for Xcel Energy’s 2024 and 2025 earnings per share reflects year-over-year growth of 5.97% and 8.06%, respectively.
Price and Consensus: XEL
DTE Energy: Detroit, MI-based DTE Energy Company, along with its subsidiaries, is engaged in regulated and unregulated energy businesses. DTE Energy aims to spend $20 billion during the 2024-2028 time frame to strengthen its electric and natural gas operations. DTE’s current dividend yield is 3.26%.
DTE’s long-term earnings growth is pegged at 8.1%. DTE’s dividend yield is 3.26%. The Zacks Consensus Estimate for DTE Energy’s 2024 and 2025 earnings per share reflects an increase of 0.14% and 0.13%, respectively, in the last 60 days.
Price and Consensus: DTE
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Evergy Inc.: Kansas City-based Evergy, along with its subsidiaries, generates and supplies electricity to customers. The company targets nearly $12.5 billion of expected base capital investments through 2028, including a new generation of around $2.9 billion, which is expected to be a renewable one.
EVRG’s long-term earnings growth is pegged at 5%. EVRG’s dividend yield is pegged at 4.35%. The Zacks Consensus Estimate for EVRG’s 2024 and 2025 earnings per share reflects an increase of 0.3% and 0.2%, respectively, in the last 60 days.
Price and Consensus: EVRG
The AES Corporation: Arlington, VA-based company generates and supplies electricity to its customers in the United States. AES Corp. remains one of the forerunners in the utility industry's transition to clean energy by investing in sustainable growth and innovative solutions while delivering superior results. Increasing demand from data centers is boosting its performance.
AES’ dividend yield is pegged at 4.03%. The Zacks Consensus Estimate for AES’ 2024 and 2025 earnings per share reflects a year-over-over increase of 8.5% and 8.8%, respectively.
Price and Consensus: AES
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4 Stocks to Watch From the Thriving Electric Power Industry
The Zacks Utility – Electric Power industry players generate and supply electricity to millions of customers across the United States. The utilities have been transitioning toward clean sources of fuel and focusing on carbon emissions reduction. 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 to customers affected by storms.
Xcel Energy (XEL - Free Report) , 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 DTE Energy Company (DTE - Free Report) , Evergy Inc.(EVRG - Free Report) and The AES Corporation (AES - Free Report) .
About The Industry
The Utility – Electric Power industry involves the generation, transmission, distribution, storage and sale of electricity to customers. A major 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. The increasing usage of the Internet globally and an expected increase in artificial intelligence (AI) in the future will create a rise in demand for electricity. AI-based queries need substantially higher power than traditional Internet searches, music and photos. Yet, 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 21% in 2023 to 23% 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) should 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 3.3% in 2024 from the 2023 level. A major portion of the electricity will be generated from clean energy sources. The development of large data centers in the United States is also increasing the electricity demand. Data centers now use 4% of the U.S. electricity load, per an Electric Power Research Institute (EPRI) report, data centers will consume between 4.6% and 9.1% of U.S. electricity by 2030. EIA predicts the price of electricity to U.S. residential customers in 2024 to average 16.16 cents per kWh, about 1.1% higher than the 2023 level and increase further in 2025 by 1.8% from the 2024 levels. New rates implemented are likely to have raised the rates year over year. EIA expects retail electricity prices in the commercial sectors to increase in 2024. The increase in electricity prices in the near term should favor 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, since the July 2023 increase, the Fed did not increase the benchmark rate. The current high interest rates will continue to adversely impact the utilities. Operators 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 cost of the long-term projects. Yet, there is a possibility of an interest rate decline before the end of 2024, which can act as a tailwind for the utilities.
Zacks Industry Rank Indicates Bright Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates upbeat near-term prospects. The 57-stock Utility-Electric Power industry is housed within the broader Zacks Utilities sector and currently carries a Zacks Industry Rank #65, which places it in the top 26% of more than 250 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate.
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.
Electric Power 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 gained 20.5% compared with its sector’s 18.7% rally. The Zacks S&P 500 composite has gained 24.2% in the same period.
Price Performance (One year)
Electric Power 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 14.76X compared with the S&P 500’s 18.56X and the Utility sector’s 15.53X.
Over the past five years, the industry has traded as high as 21.46X, as low as 11.06X and at the median of 15.32X.
Industry EV/EBITDA TTM vs S&P 500 (5yrs)
Industry EV/EBITDA TTM vs Sector (5yrs)
4 Electric Power Industry Stocks to Keep an Eye on
Utilities is a mature sector, and all the stocks selected from the Zacks Utility Electric Power industry have a market capitalization of more than $12 billion. All stocks currently have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.
Xcel Energy: Minneapolis, MN-based Xcel Energy provided electricity and natural gas to its customers. Xcel Energy’s operating utilities are engaged in the generation, purchase, transmission, distribution and sale of electricity in the United States. The company plans to invest $39 billion during the 2024-2028 period to strengthen its operations and efficiently serve its customers.
The current dividend yield of the company is 3.58% better than the Zacks S&P 500 Composite’s average of 1.54%. Long-term (three to five years) earnings growth is currently pegged at 6.39%. The Zacks Consensus Estimate for Xcel Energy’s 2024 and 2025 earnings per share reflects year-over-year growth of 5.97% and 8.06%, respectively.
Price and Consensus: XEL
DTE Energy: Detroit, MI-based DTE Energy Company, along with its subsidiaries, is engaged in regulated and unregulated energy businesses. DTE Energy aims to spend $20 billion during the 2024-2028 time frame to strengthen its electric and natural gas operations. DTE’s current dividend yield is 3.26%.
DTE’s long-term earnings growth is pegged at 8.1%. DTE’s dividend yield is 3.26%. The Zacks Consensus Estimate for DTE Energy’s 2024 and 2025 earnings per share reflects an increase of 0.14% and 0.13%, respectively, in the last 60 days.
Price and Consensus: DTE
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Evergy Inc.: Kansas City-based Evergy, along with its subsidiaries, generates and supplies electricity to customers. The company targets nearly $12.5 billion of expected base capital investments through 2028, including a new generation of around $2.9 billion, which is expected to be a renewable one.
EVRG’s long-term earnings growth is pegged at 5%. EVRG’s dividend yield is pegged at 4.35%. The Zacks Consensus Estimate for EVRG’s 2024 and 2025 earnings per share reflects an increase of 0.3% and 0.2%, respectively, in the last 60 days.
Price and Consensus: EVRG
The AES Corporation: Arlington, VA-based company generates and supplies electricity to its customers in the United States. AES Corp. remains one of the forerunners in the utility industry's transition to clean energy by investing in sustainable growth and innovative solutions while delivering superior results. Increasing demand from data centers is boosting its performance.
AES’ dividend yield is pegged at 4.03%. The Zacks Consensus Estimate for AES’ 2024 and 2025 earnings per share reflects a year-over-over increase of 8.5% and 8.8%, respectively.
Price and Consensus: AES