Utility stocks offer a safe haven when the stock market enters a downturn. They tend to be less volatile than the broader market. In addition, utility stocks pay dividends to shareholders and can raise them each year, even during recessions.
Following up on our piece on Consumer Staples stocks, here we will discuss the prospects of three utility stocks that offer above-average dividend yields.
Headed in the Right Direction
Southern Company (SO) is a major energy utility that serves ~9 million customers in the U.S. via its subsidiaries. It has a market capitalization of $80 billion.
In late April, Southern reported (4/27/23) financial results for the first quarter of 2023. Revenue dipped 2.5% over the prior year's quarter and earnings per share decreased 19%, from $0.97 to $0.79, as mild winter weather and high interest expense more than offset the effect of rate hikes. Still, Southern remains solidly profitable, and the company has missed analysts' estimates only twice in the last 25 quarters.
One positive growth catalyst is that Southern still expects the start-up at Vogtle Unit 3 in May or June. Management reaffirmed its guidance for EPS of $3.55-$3.65 in 2023 and $3.95-$4.10 in 2024.
Southern has grown its EPS at a 3.2% annual rate in the last decade and at a 3.6% annual rate in the last five years. It has provided guidance for annual EPS growth of 5%-7% in the upcoming years.
The competitive advantage of Southern is its state-regulated business, which requires excessive capital expenses for infrastructure and poses high barriers to entry to potential competitors. It is also known for its resilience during recessions. Even during severe downturns such as the Great Recession and the coronavirus pandemic, Southern has grown its earnings over time thanks to its resilient business model and rate hikes.
Southern raised its dividend by 3.0% this year and has hike its dividend for 22 consecutive years. It has not cut its dividend for 76 consecutive years.
It currently has a dividend yield of 3.8%.
The Power of Dividends
American Electric Power (AEP) was founded in 1906. It is one of the largest regulated utilities in the United States and offers electricity generation, transmission, and distribution services in 11 states. Its energy sources are coal, natural gas, renewables, nuclear, and demand response.
On May 4, American Electric Power reported Q1 results. In the first quarter, the company reported a non-GAAP EPS of $1.11, missing expectations by $0.01. However, revenue was $4.7 billion, surpassing expectations by $130 million and showing a year-over-year growth of 2.2%.
The company reaffirmed its guidance range for 2023 operating earnings (non-GAAP) at $5.19 to $5.39 per share, compared to the consensus estimate of $5.28 per share. They also stated a long-term growth rate of 6% to 7%.
One of AEP's major growth drivers moving forward will be its ambitious plans for its renewable power business, as it plans to install 3.9 GW of solar and 4.4 GW of wind power by 2030. A significant sign of its intent to become a major player in the renewable space was its acquisition of Sempra Energy's renewable business, which includes joint ownership of 7 wind farms and 1 battery installation.
Another positive is that the business is quite recession resistant. While revenues and profits dipped from 2008-2009, the dividend was maintained comfortably, and the company's results rebounded strongly in 2010.
This deal, combined with the Santa Rita wind project in Texas, will nearly quadruple AEP's renewable portfolio from its current size, with plans to grow it by another four times of its pro-rata size (nearly 16 times its current size) by 2030. The other major growth driver for the company will be its transmission business. Given its large footprint and execution experience, AEP should be well positioned to capitalize on the aging infrastructure in this space and grow considerably.
AEP has increased its dividend for 18 consecutive years. The 2023 dividend payout ratio is 63%, which means the dividend is strongly protected by the company's underlying earnings.
The shares currently yield 3.8%.
Well-Covered and Competitive Advantages
Duke Energy (DUK) began operations in 1904 by providing power to a South Carolina cotton mill. Since that time, it has grown both organically and through mergers to become one of the largest providers of energy in the U.S. Today, it produces billions of dollars in annual revenue and trades with a market capitalization of $73 billion.
Duke Energy announced their financial results for the first quarter on May 9, reporting non-GAAP EPS of $1.20. Revenue was up 3.9% year over year to $7.28 billion. These results enabled the company reaffirm its full-year guidance of non-GAAP EPS between $5.55 and $5.75 while also reiterating its annualized earnings per share growth rate target of 5-7% through 2027.
Duke's EPS have increased at an annual rate of 4% over the last decade, and we expect to see Duke continuing to generate 4%-5% annualized EPS growth over the next five years. The key determiners of Duke's value proposition to investors will be how well they can execute on their ambitious $37 billion growth CapEx plan, and if they can continue to garner favorable regulatory rulings in their operating regions.
Customer growth should continue as a low-single-digit tailwind for the foreseeable future, providing Duke with higher base demand for its services. In addition, rate increases should help boost revenue and earnings. Management has a stated plan to reduce leverage moving forward as it plans to boost cash flow.
Duke Energy has a dividend payout ratio of approximately 71% for 2023, indicating the dividend is well-covered. Duke's competitive advantage is its near monopoly in the areas it serves, which is not dissimilar to other regulated utilities.
The shares currently yield 4.3%.