9 Utility Plays to Power Up Your Portfolio

Utilities have strong appeal for more risk-averse investors as well as those seeking above-average dividends. The sector also offers appeal to growth investors as many firms expand their focus on renewables and energy efficiency. Here are some favorite utility ideas from MoneyShow.com contributors. Richard Moroney, Dow Theory Forecasts Utilities appeal to investors as a source of diversification and a steady stream of dividend payments. Also encouraging, the U.S. Energy Information Administration expects retail sales of electricity to climb 2.3% in 2021 and 1.4% in 2022 after falling 3.9% last year, a development that bodes well for the sector's sales and profit growth. Among diversified utilities, MDU Resources complements its traditional natural gas (15% of sales for the 12 months ended March) and electric (6%) utilities with a pipeline business (2%) and construction-materials (39%) and construction-services (37%) operations. MDU aims to invest $1.6 billion over five years into its utility business, intended to grow its rate base 5% annually over that stretch. Regulators use the rate base to calculate a utility's rate of return on regulated services -- essentially, a higher rate base indicates superior potential for profit growth. MDU raised its 2021 outlook for earnings per share to $2.00 to $2.15. But management has topped the consensus profit estimate in seven of the past eight quarters. The stock recently traded at 15 times estimated 2021 earnings, a 22% discount to the average utility stock. Yielding 2.8%, MDU is a long-term buy. Among electric utilities, Fortis earns a score of 89 for both sector-specific ranks. For the 12 months ended March, Fortis increased earnings per share 7%, outpacing the average of 1% for S&P 1500 Index electric utilities. Seeking to maintain recent operating momentum, Fortis plans to invest $19.6 billion over the next five years to increase its rate base at an annualized rate of 6%. The consensus currently targets 7% higher earnings per share this year, followed by 6% growth in both 2022 and 2023. Fortis yields 3.7%, in line with the average for electric utilities in the S&P 1500 Index. Few peers can match the utility's track record for dividend growth, standing at 47 consecutive years. Fortis aims to grow its dividend 6% annually through 2025. Robert Rapier, Investing Daily's Utility Forecaster UGI Corp. operates through AmeriGas Propane (a liquefied petroleum gas distribution business) and UGI Utilities (natural gas distribution utility). UGI owns the second-largest regulated gas utility in Pennsylvania and is the largest distributor of liquefied petroleum gas (LPG) in the U.S., France, Austria, Belgium, Norway, Denmark, and Luxembourg. The most recent quarter reported operating cash flow that was 24% higher than a year ago. Over the past 10 years, UGI's average annual free cash flow was $253 million, the only one of its peers to generate positive cash flow over this period. The company beat second-quarter 2021 revenue estimates by $110 million, and recently raised the quarterly dividend by 4.5% to $0.345 per share. This marked the 34th consecutive year that UGI Corporation has raised its dividend. Over the past 10 years, UGI has grown its dividend at an average annual rate of 7.0% and is targeting 4% dividend growth for the future. The low payout ratio of 31% provides a good degree of confidence that the company can continue to grow its dividend for the foreseeable future. Further, the company's price-to-earnings (P/E) ratio is only 11, significantly below the five-year average of 20.6. UGI currently yields 3.0% and is a buy up to $52. Tom Hutchinson, Cabot Dividend Investor NextEra Energy -- a former market superstar -- has been floundering for months. But I like the way alternative energy is set up going forward. Amidst the pandemic and boom in technology followed by the cyclical rally, investors forgot about this fast-growing sub-sector. But, as things normalize after the pandemic, clean energy will be a hot trade again, and this conservative play will be right there. Yielding 2.1% the utility is a buy. Xcel Energy -- a smaller and lesser-known alternative energy utility stock -- is retreating from the recent high it made last month, down almost 10%. That's not unusual behavior for XEL. It bounces around a lot on a longer-term uptrend. As with NextEra, alternative energy has been out of favor. But that shouldn't last long. It's in the spotlight in the new Administration. When the sector gets moving again it should be a big tailwind for XEL. Yielding 2.7%, we rate the utility a buy. Roger Conrad, Conrad's Utility Investor Sempra Energy -- a holding in my conservative model portfolio -- raised the mid-point of its 2021 earnings guidance range to $8.05 per share, a significant leap from the previous $7.80. A key driver of the increase is a $900 million boost in planned utility CAPEX through 2025 to $32 billion. That's fueled by 2.2% customer growth at the Texas utilities, the fastest rate since 2007. In California, gas and electricity distribution units reached an amicable resolution with the Public Utilities Commission on rates for 2022 and 2023. They also scored a win from regulators' decision last month to cut rooftop solar subsidies. The utility currently passes these directly onto ratepayers. Any reduction should enable increased spending on grid hardening and enhancement, with the company targeting 10 percent compound annual rate base growth through 2025 in the state. With the acquisition of the former IENOVA SA now closed, the newly formed Sempra Infrastructure unit ($25.2 billion enterprise value) holds all of the company's non-utility assets and operations. Those include the Cameron LNG export facility in Louisiana, roughly 1,000 megawatts of renewable energy generation, contracted midstream infrastructure (20 year average life) including 5,000 miles of pipelines and 11 of the 25 Mexican cross-border connections, and a large LNG export facility planned on the Pacific Coast of Baja California. Infrastructure is entirely self-funding and will be 20 percent-owned by financial partner KKR, once the private capital firm pays Sempra $3.37 billion in cash in the coming weeks. Management plans to fund a development pipeline of 3 GW of cross-border solar, wind and battery projects over the next few years, as well as hydrogen, green ammonia, energy storage and carbon sequestration. Putting the pieces together, Sempra appears safely on track to generate reliable mid-to-upper single-digit percentage annual earnings and dividend growth well beyond mid-decade. That should be more than enough to bring the stock's discounted valuation of 16.5 times expected next 12 months earnings closer to the 20 plus of other best in class companies. My upside target for the shares is to easily eclipse the February 2020 high of $160 plus in the next 12 to 18 months. Buy at $140 or less. Bruce Kaser, Cabot Undervalued Stocks Advisor Based in northwest Minnesota, Otter Tail Corp. -- a $2 billion market cap 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. OTTR shares have attractive upside to our $57 price target. The stock recently traded at about 18.2x estimated 2021 earnings of $2.61 and offer an attractive 3.3% dividend yield. Ben Reynolds, Sure Retirement Edison International is an energy utility that generates electricity through a variety of methods, including hydroelectric, diesel, liquid petroleum gas, natural gas, nuclear, and photovoltaic sources. The company owns more than 800 substations and nearly 100,000 miles of transmission lines, serving ~5 million customers. Edison International's competitive advantage is that it operates in a highly regulated industry with high barriers to entry. Edison is among California's largest utilities, serving about five million people in the state. The company's operations have been very recession-resilient in the past, and this will likely remain the case going forward, as consumers need electricity no matter how poor the economy is. Edison International remained highly profitable during the last financial crisis, as the company's earnings-per-share declined by just 12% between 2008 and 2009, and then started to rise again during 2010. The dividend looks relatively safe, as Edison International's operations are not overly cyclical. We note that Edison's primary risk has not been recessions, but natural disasters. Edison International's regulated utility business is a slow grower, but the business generates stable cash flows. Edison International forecasts 6% to 8% average annual rate base growth through 2023. We believe it is likely that Edison International will be able to grow its earnings-per-share at a mid-single-digit rate. Edison recently traded for 12.7 times earnings. We see Edison producing 5.6% earnings-per-share growth annually in the coming years. When combined with the current yield of 4.6%, as well as a negligible impact from the valuation, we see total projected annual returns at a very respectable 9.2%. Tim Plaehn, The Dividend Hunter Reaves Utility Income Fund is a closed-end fund that owns utility sector stocks and pays an attractive and growing income. Reaves Asset Management is an investment management firm that works exclusively in the utility stocks sector. Utilities are a safe harbor income investment class. Reaves provides that safety with a much higher yield than other utility-focused investments. Since the fund launched in 2004, the dividend, recently yielding 6.5%, has never been reduced and has regularly increased. The fund not only offers economic sector diversification to your income-focused stock portfolio, but also pays dividends monthly -- a huge bonus. I talk regularly with the Reaves Utility Fund managers, and I know the managers at Reaves Asset Management are committed to sustaining the fund's dividend. Reaves is a very conservative monthly income closed-end fund. It will outperform when the stock market gets ugly.

9 Utility Plays to Power Up Your Portfolio

Utilities appeal to investors as a source of diversification and a steady stream of dividend payments. Here are nine favorites.

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