The utility industry has been on a strong swing higher. Typically valued because they are exceptionally stable businesses with few competitive threats because of their highly regulated nature, investors can still find value among the players.
We asked three Motley Fool investors to identify utilities that still offer investors that unique combination of price, growth, and opportunity. Read on to find out why NextEra Energy (NEE +2.63%), National Grid (NGG +0.13%), and American Electric Power (AEP +1.30%) fit the bill.
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This utility provides value and more
Danny Vena (NextEra Energy): Utilities are typically thought of as income producers, though investors can occasionally find value or even growth in the sector, if they look hard enough. Very rarely will you find a stock that offers the trifecta of value, income, and the potential for growth.
NextEra Energy isn't your typical utility. It's one of the largest electric power companies in North America and the largest generator of wind and solar energy in the world. In 2016, NextEra generated 44.2 GWh from renewable sources. The company plans to spend between $40 billion and $44 billion between now and 2020 to maintain that leadership position.
NextEra Energy stock nearly tripled on a total-return basis over the last decade, and it has outperformed 71% of all companies in the S&P 500 (^GSPC 0.43%) during the same period. The company is currently forecasting adjusted earnings-per-share growth between 6% and 8% compounded annually between now and 2020.
The company has grown the dividend at a compound annual growth rate of 8.5% since 2005, more than doubling the payout during that period. It currently sports a yield of about 2.5%, with a healthy payout ratio of 42%, leaving plenty of room for future increases.
From a price-to-earnings perspective, the stock comes in at under 18. While that might not be a screaming bargain, it's far less expensive than the overall utility sector, which has a multiple of 24.
With NextEra's dividend and potential for additional growth, this stock is definitely a great value!
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An unloved market laggard
Leo Sun (National Grid): National Grid transmits electricity and gas in the U.K. and eastern U.S. As one of the world's largest utilities, National Grid is usually considered a safe place for investors to park their money. But the stock actually fell 13% over the past 12 months due to two concerns.
First, it sold a 61% stake in its U.K. gas distribution business to a consortium led by investment bank Macquarie last year. That $17.8 billion sale generated a $7.5 billion profit for the company, which the company plans to allocate to buybacks and dividends, but some analysts weren't thrilled that it would be losing up to $1.7 billion in high-margin annual revenues.
Second, unresolved Brexit issues are crushing the British pound. Since National Grid reports its earnings and pays out dividends in pounds, the currency's decline translates to a big drop for U.S. shareholders.
But despite those challenges, analysts expect National Grid's earnings to continue growing at about 3% per year, and the currency headwinds should gradually fade. The company also still pays a hefty forward dividend yield of 4.7%, which is supported by a payout ratio of 90%.
Moreover, National Grid is still cheap, at 15 times next year's earnings, even as many of its industry peers trade at higher valuations after the Dow Jones Utility Average's 14% gain over the past 12 months. Therefore, investors looking for a rock-solid utility stock with a high dividend and low valuations should give National Grid a chance.
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An iron in the fire once more
Rich Duprey (American Electric Power): The repeal of the Obama-era Clean Power Plan, which essentially wrecked coal-using energy producers and bankrupted numerous names in the industry, really won't bring them back -- or the jobs that were lost. But for utilities like American Electric Power that still rely upon coal to produce energy, it will ensure they won't follow suit and go under.
American Electric Power remains one of the country's largest utility holding companies and is highly diversified geographically, offering some measure of protection from regional economic downturns. Although it just narrowed its full-year guidance slightly lower, that was because of Hurricanes Harvey and Irma, which impacted electricity generation and consumption. The utility operator actually looks likes it's ready to grow from here as the third quarter marked the first time since 2011 that every state it operates in is finally out of recessionary conditions.
Coal-fired utilities have been on the outs for years, and it was seen as a segment that would end up on the coal ash heap of history. But the election of President Trump has given new life to these companies, and there is the very great possibility they will be able to contribute once more to economic growth and health.
Although American Electric Power's stock is 17% higher than where it started the year, it could finally be in an upcycle that sees them rise much further.
