In our view, utility stocks are not expensive, observes Roger Conrad, a long-standing specialist in the utility sector and the editor of Conrad’s Utility Investor.

When scan our proprietary Utility Report Card we find the most frequently recurring theme across the coverage universe is companies maintaining long-term earnings and dividend growth guidance, which for the best-in-class is squarely in the 5 to 7 percent range.

Better, those growth rates held up last year during the pandemic. And with regulators still supportive of the CAPEX plans behind them — and federal dollars about to flow to their purpose as well — there’s every reason to believe companies earnings and dividends will continue to rise at that robust pace going forward.

Sooner or later, that’s going to mean hefty capital gains, at least for the more successful companies in the industry. And the biggest winners are likely to be discounted stocks investors currently under owned because investors perceive more risk than is really there.

The upshot is a very bullish outlook for the sector. And while myriad factors will affect sector stocks near-term, consistently rising dividends do ultimately and reliably assure rising share prices.

So where are the best buys among low valuation stocks? Aggressive Focus stock Vistra Corp. (VST) definitely fits the bill, trading at 6.9 times next 12 months’ expected earnings, respectively.

Vistra’s Q3 results and guidance were a powerful positive surprise on all fronts. The company has not only recovered quickly from the hit it took from Winter Storm Uri. But it appears to have protected itself from the risk of another Texas energy system collapse as well.

Management also increased the mid-point of its 2021 EBITDA guidance more than 18 percent to $1.99 billion. And it announced a 2022 guidance mid-point of $3.06 billion for EBITDA and $2.37 billion for free cash flow—12 times this year’s level.

Vistra now plans to return “at least $7.5 billion” to common shareholders through 2026 with the combination of a 175 percent total dividend increase and $6 billion in share buybacks. It will also pay off $1.5 billion in debt by the end of 2022, about 10 percent of what’s owed now.

That move should induce at least one major credit agency to boost Vistra to investment grade. And the companies continues to decarbonize, shutting down coal by 2030 and building long-term contracted solar and battery storage.

Vistra suffers from a case of mistaken identity as a company hurt by energy sector decarbonization, when it is actually primed to benefit from the ongoing collision of energy transition and energy cycle. Vistra is a buy below $25.

Trading at 19 times expected next 12 months earnings, Algonquin Power & Utilities (AQN) may not look like a deep value stock. But its dividend yield is nearly 1.5 percentage points higher than the DJUA’s, despite consistent growth of 10 percent that’s two to three times higher than the typical utility.

The company also trades at a large valuation gap to NextEra Energy (NEE) which is at 33.4 times earnings and a 1.8 percent yield. That’s despite a similar dividend growth rate and strategy of combining growing, renewable-energy CAPEX-focused regulated utilities with long-term contracted wind and solar development.

Ironically, the discount widened last month on knee-jerk selling of Algonquin following the announcement it will buy the Kentucky assets of American Electric Power (AEP) for $2.82 billion including assumed debt. The acquisition is expected to be immediately accretive to earnings. And it includes a major profit expansion opportunity from replacing coal-fired power plants with renewable energy, as Algonquin has already done successfully in Missouri.

Given its smaller size (market capitalization $8.8 billion versus $168 billion), I don’t expect Algonquin to fully close its valuation gap with NextEra anytime soon. But as the company gains scale, so should the stock attract interest. Buy up to $16.

Southern Company (SO) reported solid Q3 results that were somewhat marred by another delay in starting up the two new reactors at its Vogtle site in Georgia. New guidance for an in service date of Q3 2022 for Unit 3 and Q2 2023 for Unit 4 didn’t change the company’s 2021 guidance for “above the top end” of its range of $3.25 to $3.35 per share.

Nor did it alter guidance for annual earnings growth of 5 to 7 percent through 2024. But it did trigger another writeoff of likely uncollectible additional costs. And it kept the possibility open for further delays and still higher expenses.

That’s good reason not to chase the stock above my highest recommended entry point of $65. But neither am I uncomfortable holding Southern at its current valuation of 18.4 times expected next 12 months earnings.

For one thing, the spike in natural gas prices this year has arguably increased support from Georgia regulators and politicians for the new reactors. And the service territory remains one of the strongest in the country. Buy up to 65 if you haven’t yet.

I’m also a lot more comfortable holding onto shares of PPL Corp. (PPL), following its Q3 earnings and guidance update. Management once again did not clarify what the utility’s dividend will be once it closes the acquisition of National Grid’s (NGG) Rhode Island utility, which is expected by the end of Q1 2022. But it did offer a great deal of detail about its capital plans, including doubling planned share buybacks to around $1 billion this year.

A rate settlement announced with the Federal Energy Regulatory Commission will include a rate cut. But it also maintains a solid return on equity of 10 percent and room for earnings upside with investment. And management affirmed it expects earnings to grow 5 to 7 percent a year from the initial baseline once the Rhode Island deal closes.

At a yield of nearly 6 percent, PPL is arguably pricing in a dividend cut of at least 35 to 40 percent. That’s by no means set in stone. But it should limit downside when the final rate is set.

In fact, the price actually builds in some upside if recent debt reduction and share buybacks should succeed in elevating earnings enough to bring management’s target 60 to 65 percent payout ratio into range, coupled with recent rate increases and aggressive utility CAPEX. PPL is a buy up to $32 for patient investors.

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