Reaves Utility Income Fund (UTG) is a closed-end fund that owns utility sector stocks and pays an at...
Solid Growth & Income from Public Service Enterprise
11/01/2019 5:00 am EST
We have raised our rating on the utility sector to Market-Weight from Under-Weight; the reduction in domestic interest rates now appears likely to be a prolonged phenomenon, explains equity analyst Gary Hovis, with the leading independent research firm Argus Research.
Utilities are also benefiting from lower statutory tax rates from the Tax Cuts and Jobs Act, and rotation into equities perceived as being insulated from trade-war effects.
Public Service Enterprise Group (PEG) is a combination electric and gas utility holding company, with regulated operations serving a large part of New Jersey, and non-regulated operations serving electricity markets primarily in the Mid-Atlantic and Northeast.
We expect above-average growth in the company’s rate base from these infrastructure investments, as well as higher profitability in its non-regulated operations (nuclear, solar and wind-powered electric generating operations).
In addition, we continue to project annual dividend growth of 4%-5% over the next several years. The shares currently offer a solid dividend yield of about 3.3%.
Our positive view also reflects the company’s efficiently operated nuclear generation units, focus on balance sheet improvement, and expanding economic activity in its service area.
We believe that the company’s core business strategy complements its well-balanced asset portfolio, and that its regulated electric and gas business is well positioned for growth beyond 2019
PEG trades at 17.2-times our 2020 EPS estimate, below the average multiple for electric and gas utilities with both regulated and non-regulated assets. The stock also trades at a discount to peers based on price/cash flow and price/book.
Other favorable factors are the company’s experienced management team, strong operating efficiencies, limited risk profile, solid cost controls, and generally positive relations with regulators. The company also has a strong balance sheet and continues to add new customers in an improving service area economy.
Overall, we believe that the company is committed to optimizing the value of its regulated and non-regulated assets. Our revised target price of $75, along with the dividend, implies a potential total return of about 23% from current levels.
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