8 Standout Utility Stocks for Growth and Income

Utility stocks are unlikely to ever attract the meme trading crowd. But even fast-paced traders might be well served by considering the steadier returns and lower volatility of high quality utilities. Several leading investment experts and contributors to MoneyShow.com highlight their favorite utes for investors seeking income as well as long-term growth potential. Chuck Carlson, DRIP Investor For investors wanting to own utilities but also have non-utility exposure to an improving economy, MDU Resources and UGI Corp. offer excellent options. MDU Resources offers utility services to more than one million customers across eight states -- Montana, North Dakota, South Dakota, Wyoming, Oregon, Minnesota, Idaho and Washington. In addition, the company mines construction aggregates and markets crushed stone, sand, gravel, and related construction materials. The firm is a top 10 producer of aggregates in America. This business should grow nicely as a result of increased infrastructure spending and continued growth in the economy. MDU's dividend record is outstanding, with the company boosting the annual payout for 30 consecutive years. The stock currently yields 2.5%. MDU shares have been among the better performers in the utility sector, and I expect the stock to continue to outpace both the utility sector and the broad market. Please note MDU Resources has a direct-purchase plan. Minimum initial investment is $250. In addition to its natural gas and electricity utility services, UGI is the nation's largest retail propane marketer with approximately 1.7 million customers. The company also distributes liquefied petroleum gases (LPG) and manages natural gas pipeline and storage contracts. The stock, yielding 3.1%, has outperformed the utility sector this year. I expect further strength in the stock and recommend these shares for investors searching for yield and reasonable growth. UGI's direct-purchase plan has a minimum initial investment of just $50. Richard Moroney, Dow Theory Forecasts Fortis has roots stretching back to 1885 as a tiny electric utility formed in what is now the Canadian province Newfoundland. Taking the name Fortis in 1987, the company pushed into the Caribbean in 2006 and made three multibillion-dollar acquisitions between 2012 and 2016 to expand its U.S. presence. Today, Fortis is a geographically diverse regulated utility that serves 3.3 million utility customers across nine U.S. states, five Canadian provinces, and three Caribbean countries. The utility's capital investments focus on transitioning to cleaner energy sources. Fortis plans to invest $19.6 billion in capital expenditures over five years to increase its rate base to $40.3 billion by 2025, implying annual compound growth of 6%. For the 12 months ended March, Fortis grew earnings per share 7% and sales 4%. For 2021, Fortis is expected to increase both per-share profits and revenue 7%. Fortis yields 3.7%, above the average of 3.3% for S&P 1500 utilities. The stock's lofty payout ratio -- 76% of earnings devoted to the dividend versus its sector average of 61% -- bears monitoring. But Fortis has raised its dividend in each of the past 47 years. And management aims to increase the dividend 6% annually through 2025, matching its growth rate over the past five years. The shares have returned 16% including dividends over the past three months. At a recent 22 times trailing earnings, the stock trades above the median S&P 1500 Index utility stock, a premium warranted by its growth potential. Fortis stands out among peers in Quadrix, with both sector-specific scores exceeding 75. The stock also looks timely, earning above-average ranks for Momentum, Value, Earnings Estimates, and Performance -- the same can be said of just two of the 50 utilities in the S&P 1500 Index. Admittedly, we rarely recommend utilities on our buy lists. But Fortis offers solid operating momentum, reliable dividend growth, and a decent valuation. Robert Rapier, Investing Daily's Utility Forecaster NRG Energy operates as an integrated power company in the United States. It operates throughout Texas (69% of 2020 revenues), East (26%), and West (5%). Following the recent completion of NRG's $3.6 billion acquisition of Direct Energy the company headquarters are being relocated from New Jersey to Houston, Texas. NRG is a bit riskier than conventional regulated electric utilities, in that it has substantial exposure to wholesale energy markets. This provides more potential long-term upside for the company, but at the risk that sometimes the markets will turn against them. That happened in the first quarter of this year with Winter Storm Uri that swept across Texas in February. The markets rapidly shaved 16.7% of value ($1.7 billion in market value) from NRG shares. I think the market reaction is overdone. In recent years, NRG has been a cash-generating machine. After this year's earnings hit, which is already priced into the stock, next year's earnings are projected to be back to normal levels. Further, free cash flow, one of the most important metrics for an income-generating stock, is projected to reach record levels in 2022. The company has a higher five-year beta than most utilities in its class at 0.82, but that comes with the potential for a higher payoff over time. The most compelling argument right now is that NRG is a solid company that is deeply discounted. If we ignore the impacts from the storm, NRG has all the characteristics I am looking for in an electric utility. It should be a good addition for investors who put a higher premium on growth than income. Its 3.7% yield is actually better than the group average, but the upside potential is one of the highest in the group. NRG is a new Buy in the Growth Portfolio up to $45 a share. Bruce Kaser, Cabot Turnaround Letter Below are three electric companies that have interesting catalysts along with out-of-favor stocks. Some of the names carry high risks, but offer potentially generous returns that would rival turnarounds in any industry. FirstEnergy Ohio-based First Energy is primarily a regulated electricity transmission and distribution company with over six million customers in Ohio, Pennsylvania, West Virginia, Maryland and New Jersey. Excitement arrived at this otherwise prosaic utility last July when the Ohio House of Representatives speaker was arrested on federal bribery charges related to legislation to bail out a former First Energy nuclear power company. First Energy's CEO and other senior executives were fired shortly thereafter, as it appears that First Energy used rate-payer money to help fund the bribery scheme. While the ultimate outcome is uncertain, and the scandal could spill over into future rate-setting cases, there is a good chance that the utility will reach a settlement with the Department of Justice to put the issue behind it. First Energy has subsequently overhauled its governance and compliance culture, foremost through several key hires from the board of directors (including two Icahn Capital representatives) on down. The company is also selling assets to prevent a possible equity raise. First Energy's underlying business remains sturdy, providing investors with upside potential and a 4.1% dividend yield. Otter Tail Corporation Based in northwest Minnesota, this company is a rare combination of an electric utility and a manufacturing business. Otter Tail's power operations have a solid and high-quality franchise, with a balanced mix of generation, transmission and distribution assets that produce about 75% of the parent company's earnings. An accommodative regulatory environment is allowing the utility to continue to add capacity, although its projected rate base growth is likely to be incrementally slower than in prior years. The manufacturing side includes four well-managed specialized metals and plastics companies. Here, stronger end-market growth should more than offset rising input prices. Otter Tail's sturdy balance sheet is investment grade, earnings and cash flow are growing and the company prides itself on steady dividend growth. The unusual utility/manufacturing structure might make the company a target for activists, as the two parts may be worth more separately, perhaps in the hands of larger, specialized companies. The shares trade 15% below their pre-pandemic level. PG&E Corp. In early 2019, this California utility filed for its second bankruptcy in 20 years, this time due to costs from the tragic 2017-18 wildfires. The state's controversial inverse condemnation laws, which create liability for wildfire damage caused by company-owned equipment regardless of fault, only exacerbated problems from PG&E's bureaucratic culture. PG&E emerged from bankruptcy last July, and now appears to be on the right track. New leadership, provided by the addition of Patti Pape as CEO, is the driver. Pape previously was CEO of Michigan's CMS Energy, widely-regarded as being among the best-run utilities in the industry. She has bolstered the leadership team by hiring top executives from other exceptional utilities like NextEra Energy and Berkshire Energy, who are upgrading PG&E's culture and operating effectiveness. While future wildfire liability through inverse condemnation remains, several factors help tame these risks. First, PG&E is working to reduce the chances that its equipment could spark wildfires. Also, under California's recent AB 1054 law, the state established a $21 billion insurance fund to provide coverage of wildfire costs. While coverage is by no means guaranteed, the fund provides a valuable buffer against quick-rising and crippling losses. And, in many cases, the utility can recover wildfire costs through its rate base. Although PG&E will never get the valuation of a plain, non-California utility, and the shares carry high risks, the deep discount seems unwarranted given all of the favorable changes underway. Doug Gerlach, Small Cap Informer Algonquin Power & Utilities Corp. is a renewable energy and utility company with over $15 billion of assets in Canada, the United States, Chile, and Bermuda. Its Liberty Utilities and Liberty Power units provide regulated electricity, water distribution and wastewater collection, and natural gas utility services to more than one million customer connections, primarily in North America. Algonquin Power's growing portfolio of clean, renewable wind, solar, hydro and thermal power generation facilities represents more than three gigawatts of renewable generation capacity in operation and under construction. The company's mission is to deliver clean water and energy solutions to its customers, so its focus is squarely on sustainable, low-carbon, sustainable initiatives worldwide. Algonquin Power's revenues have grown at an annualized 22.6% since 2011, with earnings per share somewhat higher (though less consistent) at 24.9% average per year. The company sees President Biden's clean energy initiatives as having the potential to create more investment opportunities as well. Acquisitions and partnerships have factored largely into Algonquin Power's historical business and we expect more of the same in the future. Analysts see Algonquin's EPS increasing 8.75% per year in the next five years, and the company expects to grow adjusted EPS 8% to 10% annually. We project revenue growth of 7% and EPS growth of 9% through fiscal 2025. In the past, Algonquin Power has been valued as more of a growth investment, with P/E ratios often above 30 prior to 2018. Since then, the company's multiples have been more in line with its changing business. Our estimates of future high and low P/E ratios are more in line with the lower range of the last two fiscal years, so we expect a high P/E of 13.1 to be attainable and a low P/E ratio of 8.2 (its 52-week low P/E). These selections result in calculated high and low prices in the next five years of $30.70 and $12.50, respectively. From the recent price of $15.45, the upside/ downside ratio is 5.2-to-1 and the projected annual total return is 18.4%. Shares are a buy up to $17. Algonquin Power's dividends have increased around 10% a year in the last decade, and the current yield is 4.4%. In a superheated market where it can be hard to find stocks to purchase at reasonable prices, a stock like Algonquin Power can provide a nice defensive hedge while also generating an income stream.

8 Standout Utility Stocks for Growth and Income

Investment experts highlight their favorite 'utes' for investors seeking income as well as long-term growth potential.

Columnist Conversation

Amazon: Friday and Next Week Might Be a Prime Buying Opportunity

This Weekend on Real Money

SDC: A Close Above the 20 DMA and Holders Will Be Smiling

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.