Sometimes utility stocks can feel downright sleepy. But things are getting better for utility stocks as more electric vehicles get sold, temperatures rise and people get frustrated with unexpected blackouts.
Five of the utility stocks Reaves Asset Management CEO Jay Rhame likes best are: NextEra Energy (ticker: NEE), Public Service Enterprise (PEG), Edison International (EIX), Exelon (EXC) and Entergy (ETR).
Reaves manages the Virtus Reaves Utilities ETF (UTES) along with other utility and infrastructure portfolios and separately managed accounts. Assets under management top $3 billion.
“EVs and the more people charge their cars in their garage at night, that’s good for utilities,” says Rhame, noting that more EVs mean more demand for power–and power that is demanded at off-peak times of day when utilities have underused capacity. “Climate change….to the degree that it incentivizes more of a changeover from a fossil fuel based electric grid to more renewable based, that’s a needle mover [for utilities] too,” adds Rhame. “That is a 10- or 20-year trend.”
Regulated utilities can get a boost from replacing, say, coal-fired power plants with wind farms. Utilities are allowed to earn returns on their capital base. They don’t earn a return on their operating expenses. With a coal plant, the fuel is an operating expense. Utilities pass along fluctuating costs to consumers, but overall, no more money drops to the bottom line.
With wind or solar power generating assets, there are essentially no operating expenses. It’s all capital cost. So a utility can expand its profit base by going renewable. It’s a little like utilities taking back the profit earned by coal providers.
There are other trends that are benefiting the utility sector too, including grid resiliency—preparing places for storms—as well as population migration—American are moving south.
Utility stock doesn’t depend on the big trends only, points out Rhame. They are pretty good, stable businesses. While investors worry about recession, “I know what the earnings earnings are going to be, I don’t really know what the
are earnings going to be or if [S&P] earnings estimates for 2023 are too high.”
Utilities are less impacted by the general economy and inflation, says Rhame. They also offer nice dividend yields. The average yield for stocks in the
Virtus Reaves Utilities ETF
is above 3%. The average yield for a stock in the S&P 500 is less than 2%.
Now for Rhame’s picks.
NextEra is the largest utility in the S&P 500 and a leader in renewable energy. The company also benefits from migration with a majority of revenues generated in Florida.
“I think the stock has certainly been volatile,” says Rhame, pointing out that a Commerce Department investigation into solar imports generated much of the recent volatility. The investigation could have resulted in fewer solar panels being available to finish projects. That threat seems to be behind the stock as shares have rallied up 17% off their May 52-week low.
is a California based utility and it trades at a lower valuation than most partly because of the threat of wildfires in the state. “We’re kind of getting into wildfire season. These are historically the scariest months to own the stock,” says Rhame. “Our thissis there is that [the state] has done a really good job with its insurance fund to avoid big damages because of forest fires. Utilities also have gotten a lot better at managing fires.”
(EXC) recently spun out unregulated power provider
has “a little bit of an older system. They probably wanted to spend more money on the distribution side, but couldn’t because they had to support the [Constellation] generation business.” says Rhame. “Now that’s out of the utility, it has better credit metrics, a higher valued stock.”
(ETR) operates in the southern US and benefits from LNG and chemical plants in its service area. “There’s a higher potential industrial growth.”
Rhame’s five utilities are trading about 16% below the average analyst price target. Their dividend yield averages 3.5%. That is not bad. And with lower volatility investors can sleep better at night if they choose to hold this quintet.
Write to Al Root at firstname.lastname@example.org