Utilities are a favorite of investors who like dividend growth, and I’ve got a great one that's already mapped out a path for earnings and dividend growth over the next few years, and it may have an upside surprise, explains Sean Brodrick, growth and income expert and editor of Wealth Megatrends.
Xcel Energy (XEL) has a market cap of around $40 billion. It is a utility and regional energy provider serving Colorado, Michigan, Minnesota, New Mexico, North Dakota, South Dakota, Texas and Wisconsin.
Its electric power generation runs the gamut, powered by coal, nuclear, natural gas, hydroelectric, solar, biomass, oil, wood/refuse and a large and growing wind business. Around 50% of its energy comes from coal and natural gas.
By 2025, it expects that share of coal and gas to go down — and renewables up. And it’s going to bring new sources of renewables online. Xcel wants to use renewables like wind energy to produce what’s called green hydrogen — a fancy term for hydrogen from renewables.
Green hydrogen is also an area of renewables that I believe is woefully underdeveloped. After all, when you burn hydrogen, the only byproduct is water. We could run our cars on green hydrogen and tell China where to stick its lithium batteries. By 2030, Xcel expects renewables (and nuclear) to provide about 75% of its power. So, it’s on the leading edge of America’s energy transition.
Its nuclear power segment is doing great. It added four new windfarms for 800 megawatts of new wind power, launched 12 new EV programs and accelerated its timeline to transition out of coal to 2034.
President Biden wants to spend $3.3 billion on clean energy growth. That includes $90 million to modernize the nation’s energy grid. This should be more money in Xcel’s pocket, and better returns for investors and customers.
Xcel sees federal clean-energy provisions — especially new and extensions of tax credits for clean energy and electric power transmission — as being solid supports.
Looking forward, the company expects to add about 2,000 megawatts in renewable energy projects across Colorado and Minnesota by 2026. It’s also going to upgrade its transmission lines to handle all that extra juice.
The company currently holds close to $22.4 billion in long-term debt. That’s up from roughly $11.2 billion in 2013. No big surprise there — building new energy projects and powerlines takes money. But Xcel can cover its interest payments with cash flow ... and still leave plenty over for a hefty dividend.
Going forward, the company expects to maintain between 5% to 7% annual growth in EPS and 8% to 10% annual shareholder returns based on capital gains and dividends.
Technically, Xcel Energy is breaking out to the upside. The force index (FI), my favorite momentum indicator, is green. This consolidation took over a year, so it built up a lot of energy for its next move. The company next reports earnings on April 28. My target is $97 a share.
