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4 Stocks to Watch From the Promising Electric Power Industry
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The Zacks Utility – Electric Power industry stocks have been transitioning toward clean sources of fuel and focusing on lower carbon emissions. The introduction of the Inflation Reduction Act 2022 should support 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 (NEE - Free Report) , 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 worth adding to your portfolio include American Electric Power (AEP - Free Report) Xcel Energy (XEL - Free Report) and Consolidated Edison (ED - Free Report) .
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 capital-intensive utilities.
3 Electric Power Industry Trends to Watch Out For
Transition Toward Cleaner Sources to Generate Power: The operators in the U.S. electric power sector are gradually moving toward cleaner sources of energy to produce electricity. Per EIA, the annual share of U.S. electricity generation from renewable energy sources will rise from 22% in 2022 to 24% in 2023 as a result of the continuing addition of solar and wind-generating capacity. EIA expects total solar, wind generation and battery storage addition from the end of 2022 to the end of 2024 to be 77 gigawatts (GW). The expansion of renewable energy continues to eat into the share of coal in electricity generation. EIA expects coal contribution to electricity generation to fall from 20% in 2022 to 17% annually in the 2023-2024 period. The passage of the Inflation Reduction Act (IRA) will support and accelerate the utilities’ transition toward clean energy sources. IRA has removed the uncertainties relating to federal incentives provided for renewable sources usage. 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. Courtesy of IRA, the utility operators are planning to add more renewable assets to their generation portfolio and shut down old polluting units. Per EIA, from 2022 end through 2024, 11 GW of coal-fired units will retire in the United States.
Demand for Electricity Stable: Per EIA, electricity consumption in the United States can drop 1.1% in 2023 and nearly 1.6% in 2024. EIA believes that the expected drop in demand for electricity this year will be due to a milder summer forecast that would lead to less requirement for cooling. Despite the expected drop in consumption, the utilities will continue to add new renewable energy assets to the total generation portfolio.
Ongoing Interest Rate Increase is a Concern: Utilities, to maintain, upgrade and expand operations, approach capital markets for loans. The utilities have been enjoying near-zero interest rates for the past few years. But multiple rate hikes in 2022 pushed up interest rates. In March 2023, the Federal Reserve again raised interest rates by 25 percentage points, taking the benchmark rate to a range of 4.75-5%. The increasing interest rates are a concern for capital-intensive utilities in the United States as these 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 and strengthening infrastructure. Utilities might try to pass on the burden of increasing borrowing costs to customers but the necessary increase 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 Bright Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates strong near-term prospects. The 56-stock Utility-Electric Power industry is housed within the broader Zacks Utilities sector and currently carries a Zacks Industry Rank #88, which places it in the top 35% 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 earnings estimate revisions, it appears that analysts are showing confidence in this group’s earnings growth potential.
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 and Sector
The Utility Electric Power industry has lagged the Zacks S&P 500 and its own sector over the past 12 months. The industry has declined 11.6%, wider than its sector’s drop of 10.6% and the Zacks S&P 500 composite’s decline of 5.7% 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 20.52X compared with the S&P 500’s 12.38X and the Utility sector’s 20.74X.
Over the past five years, the industry has traded as high as 21.03X, as low as 10.43X and at the median of 13.13X.
Industry EV/EBITDA TTM vs S&P 500 (5yrs)
Industry EV/EBITDA TTM vs Sector (5yrs)
4 Electric Power Industry Stocks to Focus 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 excess of $54 billion in different projects from 2013-2027. These investments will be directed toward modernizing and strengthening the existing infrastructure, and generating more electricity from clean sources to lower carbon emissions. NEE’s long-term (three to five years) earnings growth is pegged at 9.04%. NEE’s current dividend yield is 2.4%, which is better than the Zacks S&P 500 Composite group’s average of 1.75%.
The Zacks Consensus Estimate for NextEra Energy’s 2023 earnings reflects year-over-year growth of 7.24%. The NEE stock has gained 1% over the past 12 months against its industry’s 8.7% decline. NextEra Energy currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: NEE
American Electric Power Company Inc.: Columbia, OH-based American Electric Power generates and distributes electricity. AEP has plans to invest $40 billion in different projects in the 2023-2027 time period. AEP’s current dividend yield is 3.52%. AEP’s long-term earnings growth rate is pegged at 5.73% The Zacks Consensus Estimate for American Electric Power’s 2023 and 2024 earnings per share reflects a year-over-year increase of 3.54% and 6.12%, respectively. In the past 12 months, the stock’s loss was narrower than the industry. American Electric Power currently has a Zacks Rank #3.
Price and Consensus: AEP
Xcel Energy: Minneapolis, MN-based Xcel Energy provides electricity and natural gas to customers in eight states. Xcel Energy aims to spend $29.5 billion during the 2023-2027 time frame to strengthen and expand its transmission, distribution, electric generation and renewable projects. XEL’s current dividend yield is 2.9%. XEL’s long-term earnings growth is pegged at 6.6%. The Zacks Consensus Estimate for Xcel Energy’s 2023 and 2024 earnings per share reflects year-over-year growth of 6.3% and 6.9%, respectively. XEL stock has gained 10.2% over the past six months. Xcel Energy currently has a Zacks Rank #3.
Price and Consensus: XEL
Consolidated Edison, Inc.: 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 $14.6 billion for the 2023-2025 period. ED’s current dividend yield is 3.23%. The Zacks Consensus Estimate for Consolidated Edison’s 2023 earnings has gone up by 0.2% in the past 60 days. ED’s long-term earnings growth is pegged at 2%. The ED stock has gained 4.6% over the past 12 months. Consolidated Edison currently has a Zacks Rank #3.
Price and Consensus: ED
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4 Stocks to Watch From the Promising Electric Power Industry
The Zacks Utility – Electric Power industry stocks have been transitioning toward clean sources of fuel and focusing on lower carbon emissions. The introduction of the Inflation Reduction Act 2022 should support 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 (NEE - Free Report) , 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 worth adding to your portfolio include American Electric Power (AEP - Free Report) Xcel Energy (XEL - Free Report) and Consolidated Edison (ED - Free Report) .
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 capital-intensive utilities.
3 Electric Power Industry Trends to Watch Out For
Transition Toward Cleaner Sources to Generate Power: The operators in the U.S. electric power sector are gradually moving toward cleaner sources of energy to produce electricity. Per EIA, the annual share of U.S. electricity generation from renewable energy sources will rise from 22% in 2022 to 24% in 2023 as a result of the continuing addition of solar and wind-generating capacity. EIA expects total solar, wind generation and battery storage addition from the end of 2022 to the end of 2024 to be 77 gigawatts (GW). The expansion of renewable energy continues to eat into the share of coal in electricity generation. EIA expects coal contribution to electricity generation to fall from 20% in 2022 to 17% annually in the 2023-2024 period. The passage of the Inflation Reduction Act (IRA) will support and accelerate the utilities’ transition toward clean energy sources. IRA has removed the uncertainties relating to federal incentives provided for renewable sources usage. 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. Courtesy of IRA, the utility operators are planning to add more renewable assets to their generation portfolio and shut down old polluting units. Per EIA, from 2022 end through 2024, 11 GW of coal-fired units will retire in the United States.
Demand for Electricity Stable: Per EIA, electricity consumption in the United States can drop 1.1% in 2023 and nearly 1.6% in 2024. EIA believes that the expected drop in demand for electricity this year will be due to a milder summer forecast that would lead to less requirement for cooling. Despite the expected drop in consumption, the utilities will continue to add new renewable energy assets to the total generation portfolio.
Ongoing Interest Rate Increase is a Concern: Utilities, to maintain, upgrade and expand operations, approach capital markets for loans. The utilities have been enjoying near-zero interest rates for the past few years. But multiple rate hikes in 2022 pushed up interest rates. In March 2023, the Federal Reserve again raised interest rates by 25 percentage points, taking the benchmark rate to a range of 4.75-5%. The increasing interest rates are a concern for capital-intensive utilities in the United States as these 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 and strengthening infrastructure. Utilities might try to pass on the burden of increasing borrowing costs to customers but the necessary increase 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 Bright Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates strong near-term prospects. The 56-stock Utility-Electric Power industry is housed within the broader Zacks Utilities sector and currently carries a Zacks Industry Rank #88, which places it in the top 35% 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 earnings estimate revisions, it appears that analysts are showing confidence in this group’s earnings growth potential.
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 and Sector
The Utility Electric Power industry has lagged the Zacks S&P 500 and its own sector over the past 12 months. The industry has declined 11.6%, wider than its sector’s drop of 10.6% and the Zacks S&P 500 composite’s decline of 5.7% 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 20.52X compared with the S&P 500’s 12.38X and the Utility sector’s 20.74X.
Over the past five years, the industry has traded as high as 21.03X, as low as 10.43X and at the median of 13.13X.
Industry EV/EBITDA TTM vs S&P 500 (5yrs)
Industry EV/EBITDA TTM vs Sector (5yrs)
4 Electric Power Industry Stocks to Focus 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 excess of $54 billion in different projects from 2013-2027. These investments will be directed toward modernizing and strengthening the existing infrastructure, and generating more electricity from clean sources to lower carbon emissions. NEE’s long-term (three to five years) earnings growth is pegged at 9.04%. NEE’s current dividend yield is 2.4%, which is better than the Zacks S&P 500 Composite group’s average of 1.75%.
The Zacks Consensus Estimate for NextEra Energy’s 2023 earnings reflects year-over-year growth of 7.24%. The NEE stock has gained 1% over the past 12 months against its industry’s 8.7% decline. NextEra Energy currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: NEE
American Electric Power Company Inc.: Columbia, OH-based American Electric Power generates and distributes electricity. AEP has plans to invest $40 billion in different projects in the 2023-2027 time period. AEP’s current dividend yield is 3.52%. AEP’s long-term earnings growth rate is pegged at 5.73% The Zacks Consensus Estimate for American Electric Power’s 2023 and 2024 earnings per share reflects a year-over-year increase of 3.54% and 6.12%, respectively. In the past 12 months, the stock’s loss was narrower than the industry. American Electric Power currently has a Zacks Rank #3.
Price and Consensus: AEP
Xcel Energy: Minneapolis, MN-based Xcel Energy provides electricity and natural gas to customers in eight states. Xcel Energy aims to spend $29.5 billion during the 2023-2027 time frame to strengthen and expand its transmission, distribution, electric generation and renewable projects. XEL’s current dividend yield is 2.9%. XEL’s long-term earnings growth is pegged at 6.6%. The Zacks Consensus Estimate for Xcel Energy’s 2023 and 2024 earnings per share reflects year-over-year growth of 6.3% and 6.9%, respectively. XEL stock has gained 10.2% over the past six months. Xcel Energy currently has a Zacks Rank #3.
Price and Consensus: XEL
Consolidated Edison, Inc.: 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 $14.6 billion for the 2023-2025 period. ED’s current dividend yield is 3.23%. The Zacks Consensus Estimate for Consolidated Edison’s 2023 earnings has gone up by 0.2% in the past 60 days. ED’s long-term earnings growth is pegged at 2%. The ED stock has gained 4.6% over the past 12 months. Consolidated Edison currently has a Zacks Rank #3.
Price and Consensus: ED