Utilities appeal to investors as a source of diversification and a steady stream of dividend payments, observes Richard Moroney, growth and income expert and editor of Dow Theory Forecasts.
Also encouraging, the U.S. Energy Information Administration expects retail sales of electricity to climb 2.3% in 2021 and 1.4% in 2022 after falling 3.9% last year, a development that bodes well for the sector’s sales and profit growth. In the following paragraphs, we review our favorite utility stocks from four different industries:
Among diversified utilties, MDU Resources (MDU) complements its traditional natural gas (15% of sales for the 12 months ended March) and electric (6%) utilities with a pipeline business (2%) and construction-materials (39%) and construction-services (37%) operations.
The shares have retreated 10% in the past month, perhaps hurt by limited progress made on a U.S. infrastructure bill, but remain up 17% in 2021. The pullback has lowered MDU’s trailing P/E to 15, a 22% discount to the average utility stock.
MDU aims to invest $1.6 billion over five years into its utility business, intended to grow its rate base 5% annually over that stretch. Regulators use the rate base to calculate a utility’s rate of return on regulated services — essentially, a higher rate base indicates superior potential for profit growth.
Analyst estimates have been trending higher since May, when MDU raised its 2021 outlook for earnings per share to $2.00 to $2.15. But the current consensus of $2.11 per share, implying 8% growth, still leaves room for upside. Management has topped the consensus profit estimate in seven of the past eight quarters.
MDU trades at 15 times estimated 2021 earnings. Yielding 2.8%, MDU is a Focus List Buy, Long-Term Buy, and member of our Top 15 Utilities Portfolio.
Among gas utilities, UGI (UGI) earns above average ranks for all seven Quadrix categories, contributing to an Overall rank of 87 — higher than any other utility stock in the S&P 1500 Index. UGI scores above 90 for both sector specific ranks. The company operates natural-gas and electric utilities, as well as a propane business.
The stock, with a yield of 3.0%, has generated a 35% total return in 2021. Yet UGI trades at less than 15 times trailing earnings, ranking in the stock’s cheapest quintile based on month-end periods since 1990.
When UGI’s trailing P/E has ranked in the cheapest quintile for trailing P/E, the stock has gone on to average a 12-month total return of 17%, exceeding the stock’s average total return of 14% for all 12-month periods.
Conversely, when UGI’s trailing P/E has entered the highest quintile (above 21), the stock has averaged a total return of just 6%. UGI generates consistent growth for per-share profits, up in seven of the past eight quarters. But sales had fallen for eight straight quarters before jumping 16% in the March quarter.
Analyst estimates are rising, with the consensus projecting 12% higher earnings per share on 9% revenue growth in fiscal 2021 ending September. Looking ahead to fiscal 2022, UGI is projected to grow per-share profits 8% and sales 6%. UGI is a member of our Top 15 Utilities Portfolio.
Among electric utilities, Fortis (FTS) is primarily an electric utility (78% of revenue), with the remainder of sales coming from its natural-gas utility (21%) and natural gas storage facility (1%). The utility’s geographic exposure is broad, serving 3.3 million utility customers across nine U.S. states, five Canadian provinces, and three Caribbean countries.
The stock earns a score of 89 for both sector-specific ranks. For the 12 months ended March, Fortis increased earnings per share 7%, outpacing the average of 1% for S&P 1500 Index electric utilities.
Seeking to maintain recent operating momentum, Fortis plans to invest $19.6 billion over the next fi ve years to increase its rate base at an annualized rate of 6%. The consensus currently targets 7% higher earnings per share this year, followed by 6% growth in both 2022 and 2023. Fortis yields 3.7%, in line with the average for electric utilities in the S&P 1500 Index.
Few peers can match the utility’s track record for dividend growth, standing at 47 consecutive years. Fortis aims to grow its dividend 6% annually through 2025. Fortis is a Long-Term Buy and a member of our Top 15 Utilities Portfolio.
Among utility-energy hybrids, National Fuel Gas (NFG) owns a natural-gas utility (35% of revenue for the 12 months ended March), along with several nonregulated operations that include exploration and production of natural gas (37%), processing and gathering (9%), and pipeline and storage (18%).
The utility serves customers in New York and Pennsylvania, while exploration activity is concentrated in the Appalachian region and California.
The stock earns a Quadrix® Overall score of 57, weighed down by a subpar Momentum rank of 35. Recent operating momentum has been sluggish, with earnings per share rising just 4% in the 12 months ended March on 1% higher revenue. But the consensus calls for sales growth of 26% and per-share-profi t growth of 35% in fiscal 2021 ending September, followed by growth of 12% and 10%, respectively, in 2022.
The stock has returned 28% including dividends in 2021 yet trades at just 13 times estimated current-year profits. National Fuel Gas has paid a dividend for 119 consecutive years and increased its distribution in each of the past 51 years, including a 2% boost announced in June. Yielding 3.5%, National Fuel Gas is a member of our Top 15 Utilities Portfolio.