In This Risky Market, Consider These 8 'Boring' Utilities

Utilities may not have the same sizzle as the technology and healthcare stocks that have been favored by the market's momentum crowd. Nevertheless, several leading investing experts, and contributors to MoneyShow.com, feel the relatively boring utility space warrants attention for those seeking value, growth and income potential. Genia Turanova, Unlimited Income For more than a decade, NextEra Energy has been riding a clean energy trend -- a trend it helped to create and has greatly contributed to its success. Before 2010, it was known as FPL Group (Florida Power and Light). As the name suggests, it's an electric utility focused on serving the state of Florida. Today, NextEra's FPL division is the largest regulated electric utility in the country. It accounts for more than half of NextEra's total business (FPL generated $12.2 billion, or 63.5%, of the company's $19.2 billion revenue in 2019). The company's alternative energy segment -- NextEra Energy Resources -- is its fastest-growing business. It's responsible for just over 29% of the company's total revenue. But it's been outgrowing the FLP unit by 4 to 1. In fact, NextEra Energy Resources is now the world's largest generator of renewable energy from the wind and sun. And it's also becoming a world leader in battery storage capacity. Over the past 15 years, the company raised its quarterly dividend from $0.355 to $1.40 per share. That's a nearly 300% increase! Plus, NextEra's payout ratio of 73% means the company could easily continue paying its current dividend even if its growth slows... or (more likely) raise its dividend in the future. I expect dividend stocks in general, and utilities in particular, to benefit from historically low interest rates. Businesses with strong fundamentals and solid balance sheets -- like NextEra -- will especially benefit from better financing and refinancing conditions. It offers limited risk and higher reward. In my view, compared to the rest of the market, NextEra is still very attractive today, and its valuation premium is justified, given its growth record, future potential, and attractive yield. Rida Morwa, High Dividend Opportunities While investors have reasons to love utilities, they often don't like betting on single names. This is where Reaves Utility Income Fund comes in. This closed-end fund is a favorite of ours. It invests in utilities and infrastructure companies. It aims to provide a high level of after-tax dividend income. Since inception the fund has done quite well and beaten funds in its category over 3, 5 and 10-year time frames rather handily. The fund has lagged recently and we consider that as a chance to pick up some alpha in the future rather than a reason to dump this fine-performing fund. Meanwhile, the fund runs a fairly concentrated fund with top 10 holdings making up about 40% of the total assets. While the fund stays pretty much in the U.S., it has some holdings outside that. The fund's strength lies not only in its yield but the fact that they are one of the few funds that has never needed to cut their distribution. Indeed, they made it through the 2008-2009 recession while maintaining their distribution. The fund currently yields 7% and while that is not the stellar bargain we saw mid-March, it is certainly in line with where this fund has historically traded. Reaves Utility Income has delivered an impressive performance and done so with little fanfare. The fund currently trades at a small premium and the amount is so small that it is inconsequential. We would pick it up here and every time it went at a discount. With the broader market obsession with technology and communications, we believe valuations have pushed so far into the stratosphere that negative returns are guaranteed for many sectors on a longer-term time frame. On the other hand, utilities are trading at 7% earnings yields with many dividends exceeding 4%. It is not hard for us to envision that this will be one of the few sectors to deliver 7% plus returns. Ignore the shorter-term headwinds and play this sector via Reaves Utility Income Fund. Roger Conrad, Conrad's Utility Investor Barely a century ago, Americans enjoyed plentiful, clean and practically free drinking water. Now ensuring safe supplies and treating waste is an increasingly essential and rapidly growing $200 billion plus global market. Among the surest beneficiaries are the few U.S. investor owned utilities, headlined by Essential Utilities , a holding in our conservative model portfolio. Over the past 30 years, patiently reinvesting dividends in this company -- previously known as Philadelphia Suburban and then Aqua America -- has produced annual returns upwards of 14%. The utility's simple formula to produce those gains is consolidating and upgrading to safe standards the literally thousands of independent water and wastewater treatment systems in the U.S., including the 75% or so controlled by increasingly cash-strapped municipalities. Since 2015, Essential has added 53,000 customers by acquiring publicly owned systems. And by early next year, it will close purchases adding 202,000 more. Essential's cost of debt capital is at an all-time low, with 30-year bonds yielding less than 3% to maturity. The company also recently raised $310 million by selling stock at the elevated valuation of nearly 30 times earnings. Management boosted the quarterly dividend 7% and reported largely Covid-19 proof second-quarter earnings. That hasn't deterred the predictable knee-jerk selling from some dilution-fearing investors. But the silver lining is Essential Utilities again sells for less than our buy limit of $45. John Buckingham, The Prudent Speculator Pinnacle West Capital is a utility that provides electric service to more than 1.2 million customers via its Arizona Public Service unit. PNW's owned power plants include the Palo Verde nuclear facility, several coal-fired and gas/ oil-fired plants, as well as more than ten solar farms. Although the shares have retreated, we were pleased to see a strong second quarter for the utility as record heat drove demand. Additionally, we would expect Pinnacle West to continue to be supported by the fact that Arizona's population growth continues to be above the U.S. average, and reports suggest that the flow of new residents has accelerated in recent months. Due to the favorable weather-driven quarterly results and signs that the Phoenix economy is returning to normal, management targets full-year EPS between $4.75 and $4.95. The shares trade at a reasonable multiple for the sector and sport a solid 4.3% yield. Hilary Kramer, Value Authority Public Service Enterprise Group is a diversified utility; its regulated utility unit distributes electric energy and gas to about 70% of New Jersey's population. Investments in modernizing the grid and clean energy should drive future rate base growth of 6.5% to 8%, which, in turn, will drive earnings growth as the company gets a set regulated return on these assets. The second business is a non-regulated, power generation company that produces electricity by operating nuclear, gas, oil-fired and renewable generation assets. This division serves three markets in the Northeast, with key assets close to power-loading centers. Extensive use of hedging strategies has shielded the company from volatility in commodity prices and has helped keep gross margins and cash flows stable. The shares are off their best levels, but the stock still looks good with a safe dividend yield of 3.75% and an opportunity to add to future earnings stability by selling their non-nuclear power generation business. An added bonus is that the shares could spike higher in the event of a Biden victory -- as utilities will not be impacted by an expected corporate tax hike in a Biden administration, and money could come into the group. PEG is a buy below $53; my target is $60. Angus Kelleher-Ferguson, Argus Research WEC Energy Group is one of a few utilities that we think can serve as a core holding in a diversified portfolio, regardless of the interest rate environment. We are maintaining our buy rating based on our expectation for margin gains leading to EPS growth. We like the company's strategy and the stock's valuation. As of mid-year 2020, Management has maintained its 2020 EPS guidance of $3.71-$3.75 in the face of challenges from the coronavirus, and now expects to reach the top end of the range. WEC Energy reported strong bottom-line results in 2019 and has made three renewable energy investments as part of its five-year capital plan. WEC Energy ranks among the largest generators of electricity, and is the largest in the Midwest. Over 99% of the company's earnings come from regulated operations, which we view as more reliable than non-regulated operations. Additionally, the Federal Reserve has lowered interest rates, which has driven utility valuations higher. We believe that the company is well positioned to drive future earnings and dividend growth through its investments in its regulated businesses. In addition, WEC Energy is benefiting from recently implemented cost reductions, which, along with favorable rate case decisions, should contribute to stable earnings growth over the next few years. Management has reiterated its long-term EPS growth rate target of 5%-7%. We also like the company's focus on consistent dividend growth (in line with earnings growth). The current yield is about 2.6%. Bruce Kaser, Cabot Undervalued Stocks Advisor Quanta Services is a leading specialty infrastructure solutions provider; its infrastructure projects have meaningful exposure to highly predictable, largely non-discretionary spending with 65% of revenues coming from regulated electric, gas and other utility companies. We view this company as high quality, well run and resilient. The market views the shares as a safe haven in an unpredictable market and economy, helping the shares to fully recover from their March 2020 lows. The new 15-year contract to operate and modernize Puerto Rico's energy grid is an encouraging positive as the company is seeking to shift toward a capital-light, recurring profit model. Quanta reported strong second-quarter results, with per-share earnings of $0.74 more than doubling its year-ago results. Earnings were 57% above the consensus estimate. Overall, the company is executing its growth strategy relatively well. The company raised its full-year 2020 earnings guidance by 4% and announced a $100 million share buyback program. The shares are trading essentially at their record highs. PWR shares recently traded at 15.6x estimated 2020 earnings of $3.30 and about 12.8x estimated 2021 earnings of $4.02. For long-term holders, Quanta stock looks well positioned to continue to prosper. We are putting a $61 price target on the shares. Ben Reynolds, Sure Retirement Edison International is a renewable energy company that is active in energy generation and distribution; the company can trace its origins back to 1886. The firm'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 15 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 firm's regulated utility business is a slow grower, which is typical for utilities, but the business generates stable cash flows. Growth in the rate base helps utilities generate steady EPS growth. Meanwhile, its non-regulated segments -- such as renewable energy production via methods ranging from biomass to wind energy -- have the potential to grow at a higher rate. We believe it is likely that Edison International will be able to grow its EPS at a mid-single-digit rate going forward, relatively in line with the growth that the company has generated in the past. We expect Edison International to generate adjusted EPS of $4.40 for 2020. Based on this, the stock trades for a price-to-earnings ratio (P/E) of 11.6. Combining valuation changes with 4% expected annual earnings growth and the 5% dividend we expect total returns of 10.7% per year for Edison International stock over the next five years.

In This Risky Market, Consider These 8 'Boring' Utilities

For investors seeking value, growth and income potential - and to sleep better at night - the utility space warrants attention.

Columnist Conversation

This Could Get Messy

Latest AAP Podcast With Helene Meisler!

This Weekend on Real Money

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.