NextEra Energy and 5 Other Utility Stocks That Offer Safety and Growth in a Messy Market

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Sometimes utility stocks can feel downright sleepy, and that can be comforting when markets get messy. But you shouldn’t overlook the growth potential that could add some pep to an already attractive sector.

The

Utilities Select Sector SPDR
exchange-traded fund (ticker: XLU) has returned 0.2%, including reinvested dividends, in 2022, easily outpacing the

S&P 500’s
17% drop. Despite some hiccups due to rising yields, which typically hurt income-oriented stocks, the sector has done exactly what investors hoped it would—protect their cash during difficult times.

And times are difficult. Companies have been busy slashing their profit estimates, as rising input prices and higher labor costs eat into margins. Not utilities. Mizuho Securities analyst Anthony Crowdell expects sector earnings to grow at a 5% to 7% clip due to the regulated nature of the business. That should make them resilient, even in an economic slowdown. “While it is still debatable whether the economy is headed into a recession, the utility sector has transitioned to a pure-play regulated model that we believe will make them more defensive if the economy hits a rough patch,” he writes.

Utilities also offer some growth to go along with that stability. The rise of electric vehicles means that demand for power is only likely to increase in the years ahead, says Reaves Asset Management CEO Jay Rhame, who manages the

Virtus Reaves Utilities
ETF (UTES). The pivot to renewable energy will also benefit utilities. Due to regulations, utilities can’t earn bigger profits from higher coal or natural-gas prices. But they can earn more off capital projects—and operating expenses drop because the wind and sun are free.

That combination of growth and safety isn’t cheap, but it isn’t as expensive as it looks. Utilities trade at about 19 times 2023 earnings, above the S&P 500’s 17 times. But the index’s earnings are coming down, which means it actually trades at something closer to 19 times—and utilities typically get a premium to the market.

Here are six with potential.

AES Corp.

Key Data
Ticker	AES
Recent Price	$20.35
Year-to-Date Change	-16
P/E Ratio	11.6x
Dividend Yield	3.10%

Source: Bloomberg

AES Corp.

(AES) offers investors a stable, regulated utility business, one transitioning rapidly to renewable energy. It has become one of the world’s largest solar developers and is a big provider of renewable wind, solar, and battery backup technology to commercial customers, including

Microsoft
,

Alphabet
,
and

Amazon.com
.
The company has been reducing its coal-fired power generation, which should account for less than 10% of its total by 2025, down from roughly 25%. It also owns about 59 million shares of

Fluence Energy

(see below). Yet AES trades at a big discount to other utilities and to the S&P 500. RBC analyst Shelby Tucker has a $30 price target on the stock, up almost 50% from Wednesday’s close.

Edison International

Key Data
Ticker	EIX
Recent Price	$63.39
Year-to-Date Change	-7%
P/E Ratio	13x
Dividend Yield	4.40%

Source: Bloomberg

California is a scary place to operate a utility—which is what makes

Edison International

(EIX) stock inexpensive. With wildfire season upon us, it’s easy to imagine the worst-case scenario, with fires causing billions of dollars of damage and Edison being blamed for it. The risk may not be as great as it once was, says Rhame. California has done a good job implementing an insurance fund to help utilities avoid the big hits of the past, while utilities have gotten better at managing risks. Edison stock trades at about 13 times estimated 2023 earnings, a discount to peers and the market, even though earnings are expected to grow at about 6% a year on average for the coming few years. It pays a chunky dividend, too.

Entergy

Key Data
Ticker	ETR
Recent Price	$111.06
Year-to-Date Change	-1%
P/E Ratio	16.7x
Dividend Yield	3.60%

Source: Bloomberg

For investors interested in safety,

Entergy

(ETR) is about as defensive as it gets, with about 85% of sales coming from regulated utility operations in Arkansas, Louisiana, Mississippi, and Texas. Wall Street projects earnings growth of about 7% a year on average for the coming few years, up from 6% previously. After hurricanes and storms in 2020 and 2021, Entergy is asking regulators to approve $15 billion in grid-resiliency spending, which would give customers more reliable power and allow the utility to earn a return on the capital spent, making it a “win-win for the company and its customers,” writes Mizhuo analyst Paul Fremont. His price target is $123 a share, about 12% above recent levels.

Exelon

Key Data
Ticker	EXC
Recent Price	$44.46
Year-to-Date Change	8%
P/E Ratio	18.4x
Dividend Yield	3%

Source: Bloomberg

Stability is worth a lot to a utility—just ask Chicago-based

Exelon

(EXC). It spun out unregulated power provider

Constellation Energy

(CEG) earlier this year, and that has made all the difference. Before the spinoff, earnings would fluctuate from year to year and the stock traded at just 12 times earnings. With Constellation gone, earnings are more stable and expected to grow by 7% a year through 2025, while shares fetch about 18 times earnings. Exelon can also start to focus on improving its energy transmission business using money that would have been earmarked for Constellation. “Now that’s out, the utility has better credit metrics, a higher-valued stock,” Rhame says.

Fluence Energy

Key Data
Ticker	FLNC
Recent Price	$10.01
Year-to-Date Change	-72%
P/E Ratio	N/A
Dividend Yield	N/A

N/A=not applicable

Source: Bloomberg

For those who want a little risk with their utility investments, there’s

Fluence Energy

(FLNC). The company, a joint venture between AES and

Siemens

(SIE.Germany), sells battery storage, services, and software for renewable-power generation. It went public in October at $28, but started tumbling when the Fed first hinted at higher rates in November. Still, battery storage is one of the pillars of a sustainable-energy future, allowing for reliable power even when the sun isn’t shining and the wind isn’t blowing.

Canaccord Genuity

analyst George Gianarikas expects Fluence to turn a profit around 2024, and to generate $159 million in free cash flow by 2025. It has more than $650 million on its balance sheet.

NextEra Energy

Key Data
Ticker	NEE
Recent Price	$80.38
Year-to-Date Change	-14%
P/E Ratio	26x
Dividend Yield	2.10%

Source: Bloomberg

NextEra Energy

(NEE), the largest utility in the S&P 500 and a leader in renewable energy, has been benefiting from migration to Florida, where it generates most of its revenue. But the stock has been volatile recently, due to a Commerce Department investigation into solar imports that would have resulted in fewer panels being available to finish its projects. Those issues seem behind it, at least for now, and NextEra just turned in a solid second-quarter earnings report. The stock isn’t cheap—it trades at 26 times 2023 earnings, expensive even for a utility—but it has a reputation as a quality operator, and earnings have grown at about 8% a year on average for the past five years.

Write to Al Root at [email protected]