Are Utilities Stocks a Good Investment Today?
Morningstar energy and utilities strategist Travis Miller sees reasons to invest in utilities, saying: “We think utilities’ dividends are poised for continued growth across the sector, as we forecast dividend growth in line with our median 6% earnings growth estimate. And going forward, we expect utilities’ dividend yields to track interest rates more closely, as they have since 2022.″
Utilities stocks typically offer sizable dividend yields and, as a group, look overvalued today. “Dividends are up 5.6% sector wide in 2024, and nearly all U.S. utilities are positioned to raise their dividends again in 2025,” says Miller. Further, electricity demand is set to grow faster during the next decade than it has in 20 years. Still, Miller points to potential regulatory issues that utilities stocks face, including allowed returns versus interest rates, stranded asset risk, operating cost budgets, and rate freezes. He argues that “utilities that work with regulators to reduce these risks should realize the most earnings growth.”
These were the most undervalued utilities stocks that Morningstar’s analysts covered as of Dec. 16, 2024.
The 7 Best Undervalued Utilities Stocks to Buy
- New Fortress Energy NFE
- Eversource Energy ES
- The AES Corporation AES
- Brookfield Renewable Partners BEP
- Portland General Electric POR
- Essential Utilities WTRG
- FirstEnergy FE
Here’s a little more about each of the best utilities stocks to buy now, including commentary from the Morningstar analysts who cover them. All data is as of Dec. 16, 2024.
New Fortress Energy
Morningstar Price/Fair Value: 0.42
Morningstar Uncertainty Rating: Very High
Morningstar Economic Moat Rating: None
Forward Dividend Yield: 3.37%
Industry: Utilities—Regulated Gas
Integrated gas-to-power company New Fortress Energy is the cheapest stock on our list of best utilities stocks to buy now. This undervalued utility stock currently trades 58% below our $28 fair value estimate.
Befitting its private equity roots, New Fortress Energy seeks to provide an integrated solution for certain regions that lack where cheap, reliable, and efficient sources of power are scarce, primarily by providing gas or liquified natural gas solutions. It has been reasonably successful at identifying and acquiring infrastructure in countries such as Jamaica or Brazil that are very underutilized because of existing market challenges or relative geographic isolation, and using them to supply gas to the country, often displacing far more expensive and less reliable sources of power.
New Fortress goes beyond just sourcing and supplying gas to countries that are operating in relative energy poverty. It has built gas power plants and seeks to retain control over every part of the value chain, operating similarly to a utility. This approach has secured several LNG-to-power contracts at relatively high prices, given the cost of electricity in its markets is usually far higher than in more developed countries. The focus on energy-insecure nations also allowed it to opportunistically secure a lucrative agreement with Brazil to provide backstop power to the country’s hydro-generation, resulting in significant payments for maintaining capacity in the nation.
While these contracts address the demand side of the equation, they leave New Fortress exposed to uncertain gas supply costs. Its latest effort, called Fast LNG, is repurposing old offshore rigs for floating liquefied natural gas, or FLNG, needs. New Fortress had targeted five vessels for potential work, but only two look to actually enter service in the near term by the end of 2026 at the Altamira site in Mexico after substantial delays and cost overruns. The first of these two entered service in the second half of 2024.
New Fortress also differs from the typical US LNG exporter, in that it is more exposed to power and gas spreads than peers. As US and EU gas prices have fallen recently, its illustrative EBITDA forecasts over the next few years have declined similarly to $1.3 billion from over $5 billion.
Eversource Energy
Morningstar Price/Fair Value: 0.80
Morningstar Uncertainty Rating: Low
Morningstar Economic Moat Rating: None
Forward Dividend Yield: 4.92%
Industry: Utilities—Regulated Electric
With a fair value estimate of $73, regulated electric company Eversource Energy looks 20% undervalued. The company provides over four million customers in the Northeast US with rate-regulated electric, gas, and water services.
Eversource Energy has returned to its roots as a mostly rate-regulated distribution utility in the Northeast after exiting a multiyear effort to help develop the first round of large offshore wind projects in the US.
Clean energy goals in the Northeast create ample growth opportunities for Eversource’s distribution utilities to integrate renewable energy and reduce energy costs. However, some state regulators have been stingy due to high customer rates, limiting the upside for shareholders.
We assume Eversource invests $18 billion in 2024-27 at its electric and gas utilities to help meet regional clean energy targets and strengthen the grid. This should support 6% annual average earnings and dividend growth at least through 2026.
Eversource was one of the first US utilities to pursue offshore wind development, but management reversed course in 2022 and took nearly $2 billion of impairment charges after tax in 2023. Despite the losses, Eversource will avoid potential cost overruns by exiting its 50% stake in three projects. This gives Eversource more flexibility to fund its transmission and distribution growth projects that earn a steady regulated return.
Challenging rate regulation in Connecticut is a wild card that could affect Eversource’s growth plans in the state. If management doesn’t see a clear path to earning a fair return on its investments, it might shift investment to other states in its service territory.
Massachusetts remains an attractive area for investment with constructive regulation, support for grid modernization investments, and ambitious clean energy legislation. Almost all of Eversource’s revenue is decoupled from usage, supporting consistent cash flow growth.
Electric transmission also remains a key earnings growth driver. Eversource has been investing more than $1 billion per year in transmission since 2021, and we expect that investment rate to continue. Transmission earnings already are 40% of consolidated earnings, and that share could climb. Transmission to connect offshore wind projects is a growth opportunity.
The AES Corporation
Morningstar Price/Fair Value: 0.82
Morningstar Uncertainty Rating: High
Morningstar Economic Moat Rating: None
Forward Dividend Yield: 5.27%
Industry: Utilities—Diversified
Utilities company AES, which operates energy generation assets in more than 15 countries, is trading 18% below our fair value estimate. We think AES stock is worth $16 per share.
AES has narrowed its geographic and business focus by selling businesses in markets where the company did not have a strong platform or competitive advantage. We think his strategy has been in the best interest of shareholders. The company now has operations in fewer countries, a stronger balance sheet, and a rapidly growing renewable energy business.
Management expects earnings to grow 7% to 9% annually. We expect AES to achieve the midpoint of this range. Growth should be supported by continued development of the company’s renewable energy backlog and growth at the company’s regulated utilities.
The company is focusing more on its US operations. The share of earnings from the US has climbed to over 50%. The moaty US businesses have more stable cash flows and should experience a tailwind from renewable energy growth during the next decade. AES is focusing its renewable energy investments in the US, where the focus of the company’s backlog is located. Longer term, the company sees over 66 gigawatts of project development potential, weighted toward wind and solar in the US.
The company’s US utilities have constructive regulation, and the company has a capital investment growth plan that we think will continue to receive regulatory support. In Ohio, the company is investing to support grid modernization and network upgrades. In Indiana, the unit is seeking to convert coal generation to natural gas and add renewable energy.
The AES Next portfolio includes numerous investments in emerging energy companies. The company’s largest and most high profile was Fluence, a battery storage joint venture with Siemens that went public in late 2021. AES was also an early investor in Uplight, which provides energy providers with solutions to meet their decarbonization goals.
In 2023, management announced plans to invest in a $4 billion green hydrogen production facility in Texas, in conjunction with Air Products, to be completed in 2027. While we don’t expect hydrogen to move the needle in the near term, it could be a meaningful long-term growth area for AES.
Brookfield Renewable Partners
Morningstar Price/Fair Value: 0.82
Morningstar Uncertainty Rating: Medium
Morningstar Economic Moat Rating: None
Forward Dividend Yield: 5.95%
Industry: Utilities—Renewable
Brookfield Renewable Partners is a globally diversified, multitechnology owner and operator of clean energy assets. The firm offers the highest forward dividend yield on our list of best utilities stocks to buy. Brookfield Renewable stock is trading at an 18% discount to our fair value estimate of $29 per share.
Brookfield Renewable holds a well-diversified global portfolio of clean energy technologies assets. It has 12%-15% returns via a combination of organic growth and acquisitions. Brookfield takes a primarily contrarian approach to acquisitions.
Brookfield Renewable’s portfolio has historically been heavily weighted toward hydro generation, but that has changed in recent years, given outsize growth in wind and solar. Hydro has decreased from approximately 80%-85% of the company five years ago to approximately 50% today. We expect hydro to continue to decline as a percentage of cash flow over time, given relatively limited growth opportunities when compared with wind and solar. Solar has increased to 15%-20% of the portfolio as of 2022, and management has outlined robust growth plans expecting it to be the largest energy source in the long term.
In addition to renewable energy assets, Brookfield Renewable expanded its investment scope in 2022 to include broader energy transition asset classes. This includes novel areas, such as carbon capture, as well as traditional fossil fuel and nuclear power generation.
Brookfield Renewable has a global footprint, including North America, Latin America, Europe, and Asia. We expect the company to take a largely agnostic view toward geographies, opting to invest where the most attractive risk-adjusted returns are. However, it has said it expects roughly 75% of its portfolio to be in developed markets with the remaining 25% in developing markets over the long term, in order to manage foreign-exchange risks.
Brookfield Renewable primarily invests in assets alongside Brookfield Asset Management’s private equity funds. This approach brings the benefit of increased scale, allowing the company to pursue larger opportunities, but results in frequent acquisitions and disposals. Management seeks to add value through aggressive cost and revenue optimization. The company was historically primarily an acquirer of operating assets but has added development capabilities in recent years.
Portland General Electric
Morningstar Price/Fair Value: 0.83
Morningstar Uncertainty Rating: Low
Morningstar Economic Moat Rating: Narrow
Forward Dividend Yield: 4.52%
Industry: Utilities—Regulated Electric
Portland General Electric is our first cheap utilities stock on this list with an economic moat. This regulated electric company has a service territory that includes about half of all Oregon residents and two third of the state’s business activity. Shares of Portland stock look 17% undervalued relative to our $53 fair value estimate.
Portland General Electric has plenty of investment opportunities to serve growing electricity demand, meet Oregon’s clean energy requirements, and strengthen the system against natural disasters such as wildfires.
Oregon legislation requires PGE to cut carbon emissions on its system by 80% by 2030 and eliminate carbon emissions by 2040. Achieving these goals while maintaining reliability will require a large step-up in investment during the next two decades.
PGE is on track to average more than $1.2 billion of capital investment annually during the next five years, more than 20% above its investment rate during the last decade. The new investments include large solar and battery projects that could total $1 billion by 2030.
Regulatory support for this growth plan will be critical. Oregon regulation is mostly constructive with forward-looking rates and timely decisions. The state’s 20-year integrated resource plan and four-year action plan give PGE and regulators clarity on potential growth investments.
Four consecutive rate review settlements—most recently in late 2023—were key accomplishments demonstrating support from many stakeholders. This comes after less favorable regulatory outcomes in 2015 and 2016. The 2023 settlement also includes initial steps to reduce volatility due to PGE’s power price exposure, unusual among US-regulated utilities. The 2025 general rate case will be another regulatory test.
Electricity demand growth in the region should reduce regulatory risk as costs are spread over a larger customer base. PGE also benefits from renewable energy-specific ratemaking, reducing the need for lengthy base rate reviews.
The board made investors nervous when it skipped a dividend increase in April 2020 before raising it in July 2020, keeping PGE’s annual dividend growth streak intact. We think dividend growth will trail earnings growth slightly while PGE goes through this large investment cycle.
Essential Utilities
Morningstar Price/Fair Value: 0.89
Morningstar Uncertainty Rating: Low
Morningstar Economic Moat Rating: Narrow
Forward Dividend Yield: 3.40%
Industry: Utilities—Regulated Water
Essential Utilities is the only water provider on our list of affordable utilities stocks. The subsidiaries of this diversified holding company, which include Aqua and Peoples, provide rate-regulated electric, gas, and water distribution services. Essential Utilities stock is trading at a 11% discount to our fair value estimate of $43 per share.
For more than 50 years, Essential Utilities—formerly Aqua America—was one of the few pure-play water utilities in the US. But its $4.3 billion acquisition of Peoples Natural Gas in March 2020 made the company nearly 50% larger and diversified its earnings mix.
The gas business contributes about one third of earnings on a normalized basis. Its asset base is growing faster than that of the water business due to infrastructure upgrades. The gas business has become a critical source of growth as municipal water acquisitions have slowed recently.
Although water conservation has reduced demand for several decades, Essential has increased earnings and the dividend by replacing and upgrading old infrastructure. Similarly, Peoples Gas should produce steady earnings growth as it replaces and upgrades system infrastructure, even though we expect little usage growth.
Essential also grows by acquiring small, typically municipally owned water systems. In the US, 85% of the population is served by a municipal water utility, offering a long runway of acquisition growth opportunities. Tighter environmental standards, particularly involving per- and polyfluoroalkyl substances, could raise costs for municipalities, spurring more acquisition opportunities for utilities like Essential that have greater expertise and lower costs.
We expect 6% annual earnings growth during the next three years, in line with management’s target. Growth could trend higher if Essential can close the pending $276.5 million Delcora acquisition and increase water acquisitions. Long term, we assume an average of $150 million of water acquisitions annually.
State fair market value laws require Essential to pay municipalities at least the assessed value of the system it acquires and allow the company to add these assets to rate base at the assessed value rather than historical cost. The municipalities benefit by ensuring they get fair prices, and Essential shareholders benefit by ensuring the company doesn’t overpay for growth. In many cases, these deals are immediately value-accretive.
FirstEnergy
Morningstar Price/Fair Value: 0.91
Morningstar Uncertainty Rating: Low
Morningstar Economic Moat Rating: Narrow
Forward Dividend Yield: 4.26%
Industry: Utilities—Regulated Electric
Closing out our list of the best utility stocks to buy now is the regulated electric company FirstEnergy. They own and operate one of the nation’s largest electric transmission systems. Shares of FirstEnergy stock look 9% undervalued relative to our $44 fair value estimate.
FirstEnergy’s regulated utilities are focused on accelerating investments that should result in solid earnings growth. The company expects to invest $26 billion through 2028, a 44% increase from the previous five-year capital investment plan. This supports our expectation that the company can achieve the midpoint of management’s 6%-8% annual earnings growth target.
Achieving constructive regulatory outcomes will be important to increase FirstEnergy’s regulated utilities’ returns, which remain below allowed returns. Higher earned returns also support our earnings growth outlook. Regulators in New Jersey, Maryland, and West Virginia have recently awarded solid returns on equity. Pennsylvania and Ohio rate cases are ongoing.
FirstEnergy has raised significant capital in the past two years to support its investments and shore up its balance sheet. In 2022, it raised $3.4 billion, including $2.4 billion from selling a 19.9% minority stake in subsidiary FirstEnergy Transmission and $1 billion from new market equity. In early 2023, the company agreed to sell another 30% stake in FirstEnergy Transmission for $3.5 billion.
Proceeds from the transactions will be used to pay down debt and fund additional capital investments. FirstEnergy aims to strengthen its balance sheet and achieve its targeted 14%-15% funds from operations/debt ratio. Balance sheet strength has been a major focus for investors. With the proceeds from capital recycling, FirstEnergy will be one of the few utilities that we expect won’t need to issue equity to fund its capital investment plan.
In 2021, FirstEnergy reached an agreement with the US Department of Justice to settle its involvement in the 2020 Ohio bribery scheme. The company completed its obligations under the three-year deferred prosecution agreement. The utility recently settled with the Ohio Organized Crime Investigations Commission. We expect a settlement with the SEC. We think it’s in shareholders’ best interests to settle any remaining investigations.
Late last year, FirstEnergy increased its dividend 5%, its first dividend increase since 2020. We expect dividend growth in line with earnings growth.