Electric power utility is emerging as an industry promising gains in the long term. This space is set to see a massive acceleration in demand from artificial intelligence (AI)-driven data center growth, widespread adoption of electric vehicles (EV), and an increase in residential demand. Investors should closely watch the players in this industry with a long-term investment perspective.
At this stage, we recommend five large-cap (market capital > $10 billion) electric power utility stocks with a favorable Zacks Rank to invest in with a long-term perspective. These are — Xcel Energy Inc. XEL, Entergy Corp. ETR, WEC Energy Group Inc. WEC, Evergy Inc. EVRG and FirstEnergy Corp. FE. Each of our picks currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Huge Demand for Power
Since 2010, total demand for electric power in the United States has remained stable at around 4,000 terawatt-hours (TWh). The Electric Power Research Institute, in its “Powering Intelligence: Analyzing Artificial Intelligence and Data Center Energy Consumption” report, projected that data centers would consume 9.1% of total U.S. electricity generation by 2030 compared with 4.6% at present.
The report said, “AI queries require approximately ten times the electricity of traditional internet searches and the generation of original music, photos, and videos requires much more.” The Federal Energy Regulatory Commission reported that the data center electricity demand across the United States is expected to climb to 35 gigawatts (GW) in 2030 from 19 GW in 2023.
A research report by Rystad Energy predicted that the combined expansion of traditional and AI-driven data centers, along with chip foundries, will increase the cumulative demand for U.S. electric power by 177 TWh from 2023 to 2030, reaching a total of 307 TWh.
EVs will emerge as the second major catalyst for power demand growth in the United States. The expansion of battery EVs will raise the demand for electricity from 18.3 TWh in 2023 to 131 TWh in 2030. Rystad Energy estimates that total U.S. power demand across the residential, commercial, and industrial sectors will reach 4,500 TWh in 2030.
Major investment bank The Goldman Sachs Group Inc. (GS) forecasts that the U.S. data center power demand will grow 160% by 2030 owing to the ongoing AI revolution. The report said, “At present, data centers worldwide consume 1-2% of overall power, but this percentage will likely rise to 3-4% by the end of the decade. In the United States and Europe, this increased demand will help drive the kind of electricity growth that hasn’t been seen in a generation.”
Additional Catalysts
The Fed reduced the benchmark lending rate by an aggressive 50 basis-points in September and signaled more cuts are in the offing this year. Utility operations are capital-intensive, as consistent investments are required to upgrade, maintain and replace older wires, electric poles and power stations.
Hence, apart from internal fund sources, utilities depend on the credit market for funds to carry on upgrades. Therefore, a reduction in the benchmark lending rate will give a boost to this sector.
The utilities sector is generally defensive in nature. U.S. stock markets witnessed an impressive bull run in 2023, but the utility sector suffered a blow. Wall Street’s bull run continues in 2024. Surprisingly, this sector has become a major part of this year’s rally so far. Year to date, of the 11 broad sectors of the S&P 500 Index — the utilities sector has turned out as the best performer rallying 28.6%.
Utilities are mature and fundamentally strong as demand for such services is generally immune to the changes in the economic cycle. Such companies provide basic services like electricity, gas, water and telecommunications, which will always be in demand.
Consequently, adding stocks from the utility basket usually lends more stability to a portfolio in an uncertain market condition. Moreover, the sector is known for the stability and visibility of its earnings and cash flows. Stable earnings enable utilities to pay out consistent dividends that make them more attractive to income-oriented investors.
5 Electric Power Utility Stocks to Buy
These five utility stocks have flourished in the past three months. Their current favorable Zacks Rank indicates more upside potential.
The chart below shows the price performance of our five picks in the past three months.
Zacks Investment Research
Image Source: Zacks Investment Research
Xcel Energy Inc.
Xcel Energy is poised to benefit from its solid capital investment plan for infrastructure strengthening and clean power generation. XEL is reducing coal usage and targets to lower emissions at least 80% by 2030 and achieve carbon neutrality by 2050. XEL’s expanding customer base and rising demand act as tailwinds.
Xcel Energy has an expected revenue and earnings growth rate of 2.3% and 6%, respectively, for the current year. XEL has a current dividend yield of 3.35%. The stock price of XEL has surged 23.5% in the past three months.
Entergy Corp.
Entergy boasts an investment plan of $19 billion over the next three years to upgrade its infrastructure. ETR has also been investing in grid hardening to make its transmission and distribution systems more resilient. Returns from these investments should enable ETR to duly achieve a CAGR of 6-8% for its earnings over the 2023-2026 period. ETR plans to add more than 6,000 MW of renewable capacity by the end of 2026.
Entergy has an expected revenue and earnings growth rate of 0.5% and 6.7%, respectively, for the current year. ETR has a current dividend yield of 3.40%. The stock price of ETR has jumped 25.7% in the past three months.
WEC Energy Group Inc.
WEC Energy continues to benefit from its organic and inorganic assets’ contributions. WEC’s strategic investments should strengthen its infrastructure. LNG facilities and renewable assets will assist WEC in achieving its net carbon-neutral target by 2050. Improving demand from large and small commercial and industrial and residential customers is boosting its performance. WEC has sufficient liquidity to meet its near-term debt obligations.
WEC Energy has an expected revenue and earnings growth rate of 1.7% and 5.2%, respectively, for the current year. WEC has a current dividend yield of 3.45%. The stock price of WEC has climbed 23.9% in the past three months.
Evergy Inc.
Evergy continues to benefit from its expansion of operations in the transmission market through collaborations, strategic acquisitions and partnerships. Through planned investments and the Integrated Resource Plan, EVRG aims to add more renewable assets and become carbon neutral by 2045. EVRG improves shareholders’ value through dividend payments and has enough liquidity to meet debt obligations.
Evergy has an expected revenue and earnings growth rate of 4.1% and 8.5%, respectively, for the current year. EVRG has a current dividend yield of 4.17%. The stock price of EVRG has rallied 16.9% in the past three months.
FirstEnergy Corp.
FirstEnergy’s strengthened transmission & distribution operations and ongoing investments should increase grid reliability and enable it to serve customers efficiently. FE aims to cut emissions and become carbon neutral by 2050. FE has enough liquidity to meet debt obligations.
FirstEnergy has an expected revenue and earnings growth rate of 7.1% and 5.5%, respectively, for the current year. FE has a current dividend yield of 3.82%. The stock price of FE has advanced 14.6% in the past three months.
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