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 is picking up on the vaccination drive and resumption of economic activities. Per the U.S. Energy Information Administration (EIA), electricity sales to residential, commercial and industrial groups have improved in 2021 from the year-ago levels. The trend will likely continue next year as well. The National Oceanic and Atmospheric Administration’s climate prediction center forecasts below-normal temperatures along portions of the northern tier of the United States while warmer-than-average conditions are most likely across South United States and much of the country’s eastern region. The expected less favorable winter weather in some regions can lower demand and profitability in the near term.
Utilities operating in the United States are taking measures to strengthen their infrastructure. They have worked toward increasing operational resilience, lowering expenses and investing consistently to boost infrastructure and offer services more efficiently.
NextEra Energy ( NEE Quick Quote NEE - Free Report) , with large renewable operations and well-chalked out capital investment to strengthen infrastructure, offers an excellent opportunity to stay invested in the utility space. Other utilities that are worth holding in your portfolio include Duke Energy Corporation ( DUK Quick Quote DUK - Free Report) , Dominion Energy ( D Quick Quote D - Free Report) and Alliant Energy ( LNT Quick Quote LNT - Free Report) . About the Industry
The Utility – Electric Power industry involves the process of generation, transmission, distribution, storage and sale of electricity to residential, commercial and industrial 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 power projects based on renewable energy sources. This is helping utilities to replace coal from their generation portfolio.
3 Electric Power Industry Trends to Watch Out For
: The U.S. Energy Information Administration (“EIA”) forecasts that after declining 4% in 2020, retail sales for electricity would increase by 3.6% in 2021 and will further by 0.2% in 2022. The EIA also forecasts retail sales of electricity in the commercial and industrial sectors to increase by 3.4% and 6.7%, respectively, in 2021. For 2022, EIA forecasts total electricity consumption from the commercial and industrial sectors to grow 0.9% and 2.4%, respectively. This is an indication of the opening up of economic activities, as there is more medical expertise and knowledge to deal with the virus. This is encouraging information for the utilities, following a sharp decline of demand in the C&I group during the pandemic period. Demand for Electricity Continues to Increase : Per EIA, the U.S. electric power sector will generate 2.6% more power during 2021 than in 2020, and generation is expected to improve further by 0.2% in 2022. A gradual and definite transition in the U.S. utility space is evident, with more operators voluntarily announcing long-term plans to go carbon neutral or substantially lower emission from the historical levels. EIA forecasts renewable sources to contribute 20% of U.S. electricity production in 2021 and 22% in 2022, up from 19.8% in 2020. Natural gas is also used to produce electricity for its clean-burning nature. Both renewable energy and natural gas continue to eat into the share of coal in electricity generation. The government is helping to increase the usage of renewable through tax credits, and operators are cutting down emissions on their own, intending to achieve carbon neutrality by 2050. Move Toward Cleaner Sources to Generate Power : Per EIA, major utilities in the United States have been spending more on delivering electricity to customers and less on producing it. After adjusting for inflation, utilities spent 2.6 cents per kilowatthour (kWh) on electricity delivery in 2010, using 2020 dollars. In comparison, spending on delivery was 65% higher in 2020 at 4.3 cents/kWh. U.S. utilities are currently spending a substantial amount on developing an advanced electricity network. This network will utilize digital and other advanced technologies and assist in supplying electricity to end-users. The ultimate goal of the expenditure is to make the system strong, resilient and reliable. These upgrades will assist the network perform better amid adverse weather conditions and ensure that end-users get 24x7 supply of electricity and face minimum outages. Spending on Electric Delivery Rising Zacks Industry Rank Indicates Dismal Prospects
Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates weak near-term prospects. The 62-stock Utility - Electric Power industry is housed within the broader Utilities sector and currently carries a Zacks Industry Rank #149, which places it in the bottom 41% 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have lost confidence in this group’s earnings growth potential. In a year’s time, the industry’s earnings estimates for the current year have been revised downward by 5.9% to $2.35. 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 & Sector
The Utility Electric Power industry has underperformed its own sector and the Zacks S&P 500 composite over the past 12 months. The industry has gained 6.2% compared with its sector’s rise of 8.3% and the Zacks S&P 500 composite’s increase of 31.7% 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 14.5X compared with the S&P 500’s 15.83X and the Utility sector’s 15.6X.
Industry EV/EBITDA TTM vs S&P 500 (5yrs) Industry EV/EBITDA TTM vs Sector (5yrs)
In the past five years, the industry has traded as high as 14.51X, as low as 8.16X, with a median of 12.08X.
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 has plans to invest $34.5 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 reduce its carbon emission intensity by 67% within 2025 from the 2005 levels. NEE’s current dividend yield is 1.77%, which is better than the Zacks S&P 500 Composite group’s average of 1.34%. The Zacks Consensus Estimate for NextEra Energy’s 2021 earnings has gone up by 0.4% in the past 90 days. The NEE stock has gained 18.4% over the past 12 months. NextEra Energy currently has a Zacks Rank #3 (Hold). Price and Consensus: NEE Duke Energy Corporation: Charlotte, NC-based Duke Energy Corporation, is a diversified energy company with a broad portfolio of domestic and international, natural gas and electric and regulated and unregulated businesses, which supply, deliver and process energy in North America and selected international markets. Duke Energy has plans to invest in the range of $60-$65 billion in different projects in the 2022-2026 time period, which will support the net-zero carbon emission target of 2050. Duke Energy’s current dividend yield is 4.2%. The Zacks Consensus Estimate for Duke Energy’s 2021 earnings has gone up by 0.4% in the past 90 days. The DUK stock has gained 8.4% over the past 12 months. Duke Energy currently has a Zacks Rank #3. Price and Consensus: DUK Dominion Energy: Richmond, VA-based Dominion Energy Inc., together with its subsidiaries, produces and transports energy in the United States. Dominion Energy plans to invest $32 billion in the 2021-2025 time period to strengthen its existing infrastructure, out of which a major portion will be invested in zero-carbon generation and energy storage. Dominion aims to attain net-zero carbon and methane emissions from its electric generation and natural gas infrastructure by 2050 from the 2005 levels. Its current dividend yield is 3.36%. The Zacks Consensus Estimate for Dominion Energy’s 2021 earnings has gone up by 0.5% in the past 90 days. Year to date, D shares have gained 2.2%. Dominion Energy currently has a Zacks Rank of 3. Price and Consensus: D Alliant Energy: Madison, WI-based, Alliant Energy Corporation is a holding company with subsidiaries engaged in regulated electric and natural gas services. Alliant Energy has plans to invest $5.8 billion between 2022 and 2025. Moreover, Alliant Energy aims to retire its existing coal-fired generation units by 2040, to lower emissions from the 2005 levels by 50% and 100% within 2030 and 2050, respectively. Alliant Energy’s current dividend yield is 2.8%. The Zacks Consensus Estimate for Alliant Energy’s 2021 earnings has gone up by 1.9% in the past 90 days. The LNT stock has gained 12.5% over the past 12 months. Alliant Energy currently has a Zacks Rank #2 (Buy). Price and Consensus: LNT