Since the end of 2018, the S&P 1500 Utilities Sector Index has delivered a total return of 33% — not too shabby for a nearly three-year period that included a pandemic-induced market decline, notes Richard Moroney, editor of Dow Theory Forecasts.
Our Top 15 Utilities portfolio has returned 305.6% since its inception in 2007, versus 221.8% for the sector index. So far this year, the Top 15 has returned 8.3%, versus 7.1% for the sector index.
In the following paragraphs, we briefly review all 15 stocks on the list:
Atmos Energy (ATO) generates about 80% of its revenue from natural-gas utilities serving 3 million customers in eight states, mostly in the South, with the rest coming from pipelines and storage tanks.
The pipeline unit accounted for 36% of profits last year. The consensus projects profit growth of 8% this year, 6% in 2022, and 7% in 2023, supported by revenue growth of at least 6% in all three years.
Comcast (CMCSA) has a utility-like revenue stream delivered annualized growth of nearly 11% over the last decade, supporting annual growth of 15% in per-share profits and 17% in per-share dividends. The company’s increased focus on broadband internet to offset losses in video subscribers has set the stage for continued steady growth.
Analysts target profit growth of 19% this year, followed by 22% and 12% in the next two years. Comcast’s 1.8% yield is lowest on the Top 15 Utilities list, but the company should deliver the best dividend growth.
DTE Energy (DTE) serves 2.2 million electricity customers and 1.3 million natural-gas customers in Michigan. Yet the company generates much of its revenue from other businesses, such as power (10%), and energy marketing (30%). In July, DTE sold its gas-pipeline unit, which explains why analysts project declines in revenue and profits next year.
A $19 billion capital-investment plan, which includes electricity-network upgrades, natural-gas storage and transportation, and more than $1 billion in unregulated infrastructure spending, should help drive solid growth over the next five years.
One of the country’s largest utilities, Duke Energy (DUK) serves nearly 8 million electricity customers in the Southeast and Midwest, plus 1.6 million natural-gas customers. The company also controls more than 50,000 megawatts of generating capacity.
At 19 times trailing earnings, Duke shares aren’t cheap. However, the yield of 4.0% exceeds the sector average, and Duke remains one of the safer utilities.
Entergy (ETR) has a long-term growth record that does not impress, but the company has been gradually selling out of the wholesale-power business, and in particular reducing its nuclear exposure, while at the same time invest- ing aggressively in renewable power.
The company provides electricity to 2.9 million customers in Arkansas, Louisiana, Mississippi and Texas, and also serves about 200,000 natural-gas customers. This strong, safe pick yields 3.6%.
Evergy (EVRG), created via the merger of Great Plains Energy and Westar Energy in 2018, provides electricity to 1.6 million customers in Kansas and Missouri.
In an effort to fend off corporate raiders, Evergy has beefed up its capital-spending program to more than $9 billion over the next five years, now projecting 6% to 8% annual earnings growth through 2024, up from a prior target of 5% to 7%. Evergy and its potential acquirers agreed to wait for the 2022 annual meeting before resuming their tussle.
While we recently dropped Fortis (FTS) from our Long-Term Buy List, it remains one of our top utilities because of its predictable profit stream. The consensus projects earnings growth of 6% this year, 8% next year, and 6% in 2023. Fortis provides electricity to 2 million customers and natural gas to 1.3 million, with operations in the U.S., Canada, and the Caribbean.
MDU Resources (MDU) collects nearly 80% of its revenue from businesses unrelated to the distribution of electricity and natural gas. MDU provides construction services for utilities and also sells construction-aggregates, asphalt, and concrete — all businesses that should benefit from a spike in infrastructure spending.
At 13 times projected 2021 earnings and 11 times the 2022 target, National Fuel Gas (NFG) sports a discount of more than 23% to its industry. National Fuel Gas provides natural gas to 740,000 customers in New York and Pennsylvania but generates nearly two-thirds of its revenue from a variety of energy-related businesses, including production and pipelines.
OGE Energy (OGE) yields 4.8%, the highest in the Top 15 Utilities portfolio. The company provides electricity to 875,000 customers in Oklahoma and Arkansas and owns a 26% interest in Enable Midstream Partners (ENBL). A merger between Energy Transfer (ET) and Enable is set to close later this year, after which OGE would own 3% of the combined company.
Otter Tail (OTTR), at $2.3 billion in market capitalization the smallest stock in the Top 15, does a lot more than provide electricity to 130,000 customers in Minnesota and North Dakota. Manufacturing and plastics accounted for 30% of operating income last year and have the potential for better growth than the regulated unit.
At 15 times expected current-year earnings, Otter Tail trades at a 20% discount to the median electric utility. Factor in the market’s long-term profit-growth target of 8% a year, and Otter Tail’s PEG (price/earnings-to-growth) ratio of 2.3 is among the lowest in the sector.
Portland General Electric (POR) is a new addition to the Top 15 Utilities portfolio. Portland provides electricity to 908,000 customers in Oregon. The company’s growth hasn’t been impressive recently, but we see plenty of value in its capital investments, and its service area is recovering better than many others.
Analyst projections of less than 1% profit growth this year and next seem parsimonious. At 17 times trailing earnings, Portland trades at an 8% discount to its industry median.
Public Service Enterprise Group (PEG) operates utilities that distribute electricity to 2.3 million customers and natural gas to 1.9 million, all in New Jersey. Public Service also owns a power subsidiary.
Analysts target lower sales and profits next year, though much of that weakness stems from the pending divestiture of fossil-fuel plants in a $1.9 billion deal signed in August and expected to close in the first quarter of 2022. The company plans to use the proceeds to pay down debt. Public Service yields 3.3%, above the industry average.
Like many natural-gas utilities, UGI (UGI) suffers from wide seasonal swings in revenue and profits. The propane business, which accounts for nearly two-thirds of revenue, does little to smooth out those revenues.
But if you can look beyond the quarter-to-quarter gyrations, UGI seems capable of at least 8% annual profit growth over the next five years, high for a utility. At 14 times expected current-year earnings, UGI trades at a 14% discount to its industry median.
Old-line telephone titan Verizon Communications (VZ) reinvented itself during the wireless boom and now serves more than 120 million wireless customers and more than 11 million broadband or video customers.
Verizon invested heavily in C-band spectrum this year to support its 5G service, spending that could boost debt but also boosts our confidence that the company can meet or exceed the market’s modest long-term profit-growth expectations (3% annually over the next five years). Verizon yields 4.7%.