Raging inflation is entering all facets of our lives.
Take home electricity prices, for example. They rose 3.6% nationwide in the 12 months through February, the Energy Information Administration (EIA) reports. The gain totaled a whopping 14.9% in both Florida and New York.
Those rates are likely to keep rising as utilities spend money to protect against natural disasters caused by climate change and to curb carbon emissions.
While you may have no choice but to pay higher electricity rates, you may be able to take advantage of the situation by purchasing utility stocks.
Utilities’ spending may improve their performance. And many of them offer attractive dividend payments, though valuation is an issue after a year of outperforming the market.
Here is how research firm Morningstar looks at some of the biggest utilities.
· NextEra (NEE). “NextEra Energy's high-quality regulated utility in Florida and fast-growing renewable energy business give investors the best of both worlds: a secure dividend and industry-leading renewable energy growth potential,” Morningstar analyst Andrew Bischof wrote in a commentary. The regulated utility “benefits from constructive regulation…,” he said. And NextEra’s “highly-contracted competitive energy business has proved to be a best-in-class renewable energy operator and developer.” Bischof puts fair value for the stock at $78. It recently traded at $71.70. Dividend yield: 2.16%.
· Exelon (EXC). “After spinning off its merchant generation and retail energy segment, Constellation Energy (CEG) , … Exelon is now a pure-play electric and gas transmission and distribution utility,” Bischof wrote. “We view the separation positively for shareholders. We previously valued Exelon at a discount to its fully-regulated peers in large part because of its generation and retail operations.” He puts fair value for the stock at $39. It recently traded at $47.23. Dividend yield: 2.82%.
· Duke Energy (DUK). “Duke's regulatory environment is consistent with its peers and is supported by better-than-average economic fundamentals in its key regions,” Bischof wrote. “These factors contribute to the returns Duke has earned and have led to a constructive working relationship with its regulators, the most critical component of a regulated utility's moat.” He particularly likes Duke's regulated businesses in Florida and Indiana. Bischof puts fair value for the stock at $101. It recently traded at $109.70. Dividend yield: 3.57%.
· Southern Co. (SO). “Southern is undergoing one of the most dramatic transformations in the utilities sector as it tries to cut its greenhouse gas emissions profile,” wrote Morningstar analyst Travis Miller The company is reducing coal usage and boosting nuclear, natural gas and renewable energy. The transformation has suffered setbacks. But the company has “one of the best management teams in the industry,” Miller said. “We continue to forecast 6% earnings growth.” He puts fair value for the stock at $65. It recently traded at $74.06. Dividend yield: 3.65%.
The author of this story owns shares of Duke Energy.
