The Top Turnaround in the Utility Sector

11/28/2017 5:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

All things considered, the near to intermediate-term future looks bright for utility stocks and the sector’s prospects for earnings and dividend growth, suggests Roger Conrad, editor of Conrad's Utility Investor.

After more than a decade of de-risking and balance sheet repair, the utility sector finds itself in its best financial shape in decades — just in time for a new investment cycle as companies transition from older coal-fired power plants to more-efficient gas-fired facilities and lower-cost renewable energy.

With the Dow Jones Utility Average making new highs, investors must consider how much of this good news the market has priced in to sector favorites. Although the utility sector’s valuations make us cautious, we haven’t thrown in the towel and have continued to find value in the market.

Our favorite turnaround story in the utility sector — AES Corp. (AES) — trades at a compelling valuation of barely 10 times earnings. Recent news flow underscores how much the company has changed in recent years.

A week after announcing solid second-quarter results, the company issued $500 million of 10-year notes at a coupon rate of 5.125 percent and used the proceeds to buy back its 8 percent senior notes due in 2020.

Smart moves to reduce interest expense and push out maturities put AES Corp on a sounder footing and mark yet another step in the company’s march toward achieving an investment-grade credit rating by early next decade.

Besides focusing on shoring up its balance sheet, AES Corp has emerged as a leader in energy storage and recently expanded its renewable-energy portfolio with the purchase of sPower’s contracted solar-power projects.

Despite ongoing challenges in Latin America, AES Corp remains on track to meet management’s guidance for 8 to 10 percent earnings growth while de-risking its portfolio by exiting Kazakhstan and other problematic markets. AES Corp remains a buy up to $15 for patient investors.

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