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Zacks Industry Outlook Highlights NextEra Energy, American Electric Power, WEC Energy Group and CenterPoint Energy
Read MoreHide Full Article
For Immediate Release
Chicago, IL – August 4, 2022 – Today, Zacks Equity Research discusses NextEra Energy (NEE - Free Report) , American Electric Power Company (AEP - Free Report) , WEC Energy Group (WEC - Free Report) and CenterPoint Energy Inc. (CNP - Free Report) .
4 Electric Power Stocks to Buy From the Prospering Industry
The prospects of the Zacks Utility – Electric Power industry look better in 2022 as demand for utility services from the Commercial and Industrial (C&I) group are picking up on the vaccination drive and resumption of economic activities. Per the U.S. Energy Information Administration (EIA), 46.1 gigawatts (GW) of new utility-scale electric generating capacity will be added to the U.S. power grid in 2022. Utilities operating in the United States are taking measures to strengthen their infrastructure.
NextEra Energy, with large renewable operations and well-chalked-out capital investments to strengthen infrastructure, offers an excellent opportunity to stay invested in the utility space. Other utilities that are worth adding to your portfolio include American Electric Power Company, WEC Energy Group and CenterPoint Energy Inc..
About the Industry
The Utility – Electric Power industry involves the process of 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 or unprecedented incidents, such as the coronavirus pandemic, demand for the services provided by utilities remains more or less steady, regardless of economic cycles. A clear transition is evident in this industry, with more companies declaring zero-emission goals on their own. 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 the reduction of emissions. However, the ongoing increase in interest rates is a concern for the capital-intensive utilities.
3 Electric Power Industry Trends to Watch Out For
Demand for Electricity Continues to Increase: Per EIA, total consumption of electricity in the United States, including sales to ultimate customers and direct use of electricity by generators, will increase by 2% in 2022 and 1% in 2023. Electricity sales to customers in the U.S. commercial and industrial sectors are growing faster than sales to the residential sector. With increased medical knowledge and usage of vaccines, the impact of COVID-19 has reduced substantially, resulting in the reopening of economic activities across the United States. The same trend is expected to continue in 2023. This is encouraging information for the utilities, following a sharp decline in demand in the C&I group during the pandemic period.
Transition Toward Cleaner Sources to Generate Power: The operators in the U.S. electric power sector are gradually moving toward the cleaner sources of energy to produce electricity. Per EIA, the annual share of U.S. electricity generation from renewable energy sources will rise from 20% in 2021 to 22% in 2022 and 24% in 2023 as a result of the continuing addition in solar and wind-generating capacity. EIA expects total solar and wind generation of 32 GW and 29 GW to be added in 2022 and 2023, respectively. The expansion of renewable energy continues to eat into the share of coal in electricity generation and EIA expects coal contribution to electricity generation to fall from 23% in 2021 to 21% in 2022 and 20% in 2023. The government is helping to increase the usage of renewable energy through tax credits, and operators are cutting down emissions on their own, intending to achieve carbon neutrality by 2050.
Ongoing Increase Rate is a Concern: Utilities to maintain, upgrade and expand operations need to approach the capital markets for loans to fund their capital projects. Utilities regularly distribute dividend from their profits and don’t necessarily have enough retained profits to fund capital projects. The utilities have been enjoying near-zero interest rate for the past few years, but from December 2021, the Federal Reserve has revised interest rates upward four times, taking the benchmark rate to a range of 2.25%-2.5%. The Fed has intentions to increase rates further in 2022.
The increasing interest rates are a concern for the capital-intensive utilities in the United States as they will push up capital servicing costs substantially from the current levels. U.S. utilities are currently spending a substantial amount on developing an advanced electricity network. Utilities might try to pass on the burden of increasing borrowing costs to customers, but the necessary raise in rates might not get approved by the commission. In such a scenario, the utilities will need to digest the extra expenses, which can lower their profitability and make them less attractive to investors interested in the utility space.
Zacks Industry Rank Indicates Positive 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 59-stock Utility - Electric Power industry is housed within the broader Zacks Utilities sector and currently carries a Zacks Industry Rank #82, which places it in the top 33% 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. Looking at the upward earnings estimate revisions, it appears that analysts are showing confidence in this group’s earnings growth potential. Since June 2022, the industry’s earnings estimates for the current year have been revised upward by 3.2% to $2.59.
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 Outperforms S&P 500 and Sector
The Utility Electric Power industry has outperformed the Zacks S&P 500 and its own sector over the past 12 months. The industry has gained 8.8% compared with its sector’s rise of 7.3% and the Zacks S&P 500 composite’s decline of 7.7% in the same period.
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 16.57X compared with the S&P 500’s 12.68X and the Utility sector’s 18.81X.
In the past five years, the industry has traded as high as 17.52X, as low as 10.42X, with a median of 12.83X.
4 Electric Power Industry Stocks to Keep an Eye On
NextEra Energy: Juno Beach, FL-based NextEra Energy is engaged in the generation, transmission, distribution and sale of electric energy. The company expects capital deployment in the range of $85-$95 billion in different projects in the 2022-2025 time period. These investments will be directed toward modernizing and strengthening the existing infrastructure, and generating more electricity from clean sources to lower carbon emissions. NextEra expects to achieve zero carbon emission intensity by 2045. NEE’s current dividend yield is 1.99%, which is better than the Zacks S&P 500 Composite group’s average of 1.61%.
The Zacks Consensus Estimate for NextEra Energy’s 2022 earnings has gone up by 2.1% in the past 60 days. NEE’s long-term (three to five years) earnings growth is pegged at 9.3%. The NEE stock has gained 12.7% over the past six months compared with its industry’s 6.8% rally.
American Electric Power Company Inc.: Columbia, OH-based American Electric Power generates and distributes electricity to residential, commercial, industrial and wholesale end markets. American Electric Power has plans to invest $38 billion in different projects in the 2022-2026 time period. AEP’s current dividend yield is 3.15%.
The Zacks Consensus Estimate for American Electric Power’s 2022 earnings has gone up by 0.6% in the past 60 days. AEP’s long-term earnings growth is pegged at 6.2%. The AEP stock has gained 10.4% over the past six months. American Electric Power currently has a Zacks Rank #2.
WEC Energy Group: Milwaukee, WI-based WEC Energy is a diversified holding company, engaged in the generation and distribution of electricity in southeastern, east central and northern Wisconsin, as well as in the upper peninsula of Michigan. WEC Energy has plans to invest $17.7 billion in different projects in the 2022-2026 time period. WEC’s current dividend yield is 2.8%.
The Zacks Consensus Estimate for WEC Energy’s 2022 earnings has gone up by 0.3% in the past 60 days. WEC’s long-term earnings growth is pegged at 6.1%. The WEC stock has gained 9.5% over the past six months. WEC Energy currently has a Zacks Rank #2.
CenterPoint Energy: Houston, TX-based CenterPoint Energy Inc. is a domestic energy delivery company that provides electric transmission & distribution, natural gas distribution and competitive natural gas sales and services operations. CenterPoint Energy has plans to invest $19.3 billion in different projects in the 2022-2026 time period. CNP’s current dividend yield is 2.8%.
The Zacks Consensus Estimate for CenterPoint Energy’s 2023 earnings has gone up by 2% in the past 60 days. CNP’s long-term earnings growth is pegged at 3.9%. The CNP stock has gained 13.46% over the past six months. CenterPoint Energy currently has a Zacks Rank #2.
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights NextEra Energy, American Electric Power, WEC Energy Group and CenterPoint Energy
For Immediate Release
Chicago, IL – August 4, 2022 – Today, Zacks Equity Research discusses NextEra Energy (NEE - Free Report) , American Electric Power Company (AEP - Free Report) , WEC Energy Group (WEC - Free Report) and CenterPoint Energy Inc. (CNP - Free Report) .
Industry: Utility - Electric Power
Link to article: https://www.zacks.com/commentary/1963116/4-electric-power-stocks-to-buy-from-the-prospering-industry
4 Electric Power Stocks to Buy From the Prospering Industry
The prospects of the Zacks Utility – Electric Power industry look better in 2022 as demand for utility services from the Commercial and Industrial (C&I) group are picking up on the vaccination drive and resumption of economic activities. Per the U.S. Energy Information Administration (EIA), 46.1 gigawatts (GW) of new utility-scale electric generating capacity will be added to the U.S. power grid in 2022. Utilities operating in the United States are taking measures to strengthen their infrastructure.
NextEra Energy, with large renewable operations and well-chalked-out capital investments to strengthen infrastructure, offers an excellent opportunity to stay invested in the utility space. Other utilities that are worth adding to your portfolio include American Electric Power Company, WEC Energy Group and CenterPoint Energy Inc..
About the Industry
The Utility – Electric Power industry involves the process of 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 or unprecedented incidents, such as the coronavirus pandemic, demand for the services provided by utilities remains more or less steady, regardless of economic cycles. A clear transition is evident in this industry, with more companies declaring zero-emission goals on their own. 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 the reduction of emissions. However, the ongoing increase in interest rates is a concern for the capital-intensive utilities.
3 Electric Power Industry Trends to Watch Out For
Demand for Electricity Continues to Increase: Per EIA, total consumption of electricity in the United States, including sales to ultimate customers and direct use of electricity by generators, will increase by 2% in 2022 and 1% in 2023. Electricity sales to customers in the U.S. commercial and industrial sectors are growing faster than sales to the residential sector. With increased medical knowledge and usage of vaccines, the impact of COVID-19 has reduced substantially, resulting in the reopening of economic activities across the United States. The same trend is expected to continue in 2023. This is encouraging information for the utilities, following a sharp decline in demand in the C&I group during the pandemic period.
Transition Toward Cleaner Sources to Generate Power: The operators in the U.S. electric power sector are gradually moving toward the cleaner sources of energy to produce electricity. Per EIA, the annual share of U.S. electricity generation from renewable energy sources will rise from 20% in 2021 to 22% in 2022 and 24% in 2023 as a result of the continuing addition in solar and wind-generating capacity. EIA expects total solar and wind generation of 32 GW and 29 GW to be added in 2022 and 2023, respectively. The expansion of renewable energy continues to eat into the share of coal in electricity generation and EIA expects coal contribution to electricity generation to fall from 23% in 2021 to 21% in 2022 and 20% in 2023. The government is helping to increase the usage of renewable energy through tax credits, and operators are cutting down emissions on their own, intending to achieve carbon neutrality by 2050.
Ongoing Increase Rate is a Concern: Utilities to maintain, upgrade and expand operations need to approach the capital markets for loans to fund their capital projects. Utilities regularly distribute dividend from their profits and don’t necessarily have enough retained profits to fund capital projects. The utilities have been enjoying near-zero interest rate for the past few years, but from December 2021, the Federal Reserve has revised interest rates upward four times, taking the benchmark rate to a range of 2.25%-2.5%. The Fed has intentions to increase rates further in 2022.
The increasing interest rates are a concern for the capital-intensive utilities in the United States as they will push up capital servicing costs substantially from the current levels. U.S. utilities are currently spending a substantial amount on developing an advanced electricity network. Utilities might try to pass on the burden of increasing borrowing costs to customers, but the necessary raise in rates might not get approved by the commission. In such a scenario, the utilities will need to digest the extra expenses, which can lower their profitability and make them less attractive to investors interested in the utility space.
Zacks Industry Rank Indicates Positive 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 59-stock Utility - Electric Power industry is housed within the broader Zacks Utilities sector and currently carries a Zacks Industry Rank #82, which places it in the top 33% 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. Looking at the upward earnings estimate revisions, it appears that analysts are showing confidence in this group’s earnings growth potential. Since June 2022, the industry’s earnings estimates for the current year have been revised upward by 3.2% to $2.59.
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 Outperforms S&P 500 and Sector
The Utility Electric Power industry has outperformed the Zacks S&P 500 and its own sector over the past 12 months. The industry has gained 8.8% compared with its sector’s rise of 7.3% and the Zacks S&P 500 composite’s decline of 7.7% in the same period.
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 16.57X compared with the S&P 500’s 12.68X and the Utility sector’s 18.81X.
In the past five years, the industry has traded as high as 17.52X, as low as 10.42X, with a median of 12.83X.
4 Electric Power Industry Stocks to Keep an Eye On
NextEra Energy: Juno Beach, FL-based NextEra Energy is engaged in the generation, transmission, distribution and sale of electric energy. The company expects capital deployment in the range of $85-$95 billion in different projects in the 2022-2025 time period. These investments will be directed toward modernizing and strengthening the existing infrastructure, and generating more electricity from clean sources to lower carbon emissions. NextEra expects to achieve zero carbon emission intensity by 2045. NEE’s current dividend yield is 1.99%, which is better than the Zacks S&P 500 Composite group’s average of 1.61%.
The Zacks Consensus Estimate for NextEra Energy’s 2022 earnings has gone up by 2.1% in the past 60 days. NEE’s long-term (three to five years) earnings growth is pegged at 9.3%. The NEE stock has gained 12.7% over the past six months compared with its industry’s 6.8% rally.
NextEra Energy currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
American Electric Power Company Inc.: Columbia, OH-based American Electric Power generates and distributes electricity to residential, commercial, industrial and wholesale end markets. American Electric Power has plans to invest $38 billion in different projects in the 2022-2026 time period. AEP’s current dividend yield is 3.15%.
The Zacks Consensus Estimate for American Electric Power’s 2022 earnings has gone up by 0.6% in the past 60 days. AEP’s long-term earnings growth is pegged at 6.2%. The AEP stock has gained 10.4% over the past six months. American Electric Power currently has a Zacks Rank #2.
WEC Energy Group: Milwaukee, WI-based WEC Energy is a diversified holding company, engaged in the generation and distribution of electricity in southeastern, east central and northern Wisconsin, as well as in the upper peninsula of Michigan. WEC Energy has plans to invest $17.7 billion in different projects in the 2022-2026 time period. WEC’s current dividend yield is 2.8%.
The Zacks Consensus Estimate for WEC Energy’s 2022 earnings has gone up by 0.3% in the past 60 days. WEC’s long-term earnings growth is pegged at 6.1%. The WEC stock has gained 9.5% over the past six months. WEC Energy currently has a Zacks Rank #2.
CenterPoint Energy: Houston, TX-based CenterPoint Energy Inc. is a domestic energy delivery company that provides electric transmission & distribution, natural gas distribution and competitive natural gas sales and services operations. CenterPoint Energy has plans to invest $19.3 billion in different projects in the 2022-2026 time period. CNP’s current dividend yield is 2.8%.
The Zacks Consensus Estimate for CenterPoint Energy’s 2023 earnings has gone up by 2% in the past 60 days. CNP’s long-term earnings growth is pegged at 3.9%. The CNP stock has gained 13.46% over the past six months. CenterPoint Energy currently has a Zacks Rank #2.
Why Haven’t You Looked at Zacks' Top Stocks?
Our 5 best-performing strategies have blown away the S&P's impressive +28.8% gain in 2021. Amazingly, they soared +40.3%, +48.2%, +67.6%, +94.4%, and +95.3%. Today you can access their live picks without cost or obligation.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.