Everybody was positive as the Federal Reserve began raising interest rates back in December that the rates would slowly but surely start to rise. The fact of the matter is the yield on the 30-year Treasury bond is the same as it was this time last year, and demand for our government debt has skyrocketed as central banks around the world have pushed their government debt to historic lows via quantitative easing measures of their own.
With the Dow Jones utility index trading right near all-time highs, many investors are somewhat nervous about owning the sector. In a new research report, Deutsche Bank remains bullish on utilities, especially those operating in Texas as the public utility commission recently decided against opening a generic tax proceeding. The analyst feels it lifts the overhang that has been over three top stocks of the four rated Buy in the report.
American Electric Power
This industry leader is also a solid dividend-paying company. American Electric Power Co. Inc. (NYSE: AEP) is one of the largest electric utilities in the United States, delivering electricity to more than 5.3 million customers in 11 states. It ranks among the nation’s largest generators of electricity, owning nearly 38,000 megawatts of generating capacity in the United States. It also owns the nation’s largest electricity transmission system, a more than 40,000-mile network that includes more 765 kilovolt extra-high voltage transmission lines than all other U.S. transmission systems combined.
Many on Wall Street feel that the stock trades at a discount to its utility peers and they feel it deserves a premium. They also think the company may sell generating assets and buy back shares with the proceeds, which will be accretive.
American Electric Power shareholders receive a 3.4% dividend. The Deutsche Bank price objective for the stock is $63 and could go higher. The Thomson/First Call consensus price target is $67.24, and shares closed on Friday at $66.05.
This is the company that does not operate in the Texas market. Dynegy Inc. (NYSE: DYN) sells its services on a wholesale basis from its power-generation facilities. It has a fleet of 35 power plants in eight states, totaling approximately 26,000 megawatts of generating capacity. The company serves a range of customers, including regional transmission organizations, independent system operators, integrated utilities, municipalities, electric cooperatives, transmission and distribution utilities and power marketers, as well as financial participants, such as banks and hedge funds, and residential, commercial and industrial end-users.
Dynegy currently does not pay a dividend. The $17 Deutsche Bank price target is less than the consensus target of $21.77. Shares closed on Friday at $15.58.
This top utility stock also makes good sense now for conservative accounts. Exelon Corp. (NYSE: EXC) is the nation’s leading competitive energy provider, with 2014 revenues of approximately $27.4 billion. Headquartered in Chicago, Exelon does business in 48 states, the District of Columbia and Canada. Exelon is one of the largest competitive U.S. power generators, with approximately 32,500 megawatts of owned capacity comprising one of the nation’s cleanest and lowest-cost power generation fleets.
The company’s Constellation business unit provides energy products and services to more than 2.5 million residential, public sector and business customers, including more than two-thirds of the Fortune 100. Exelon’s utilities deliver electricity and natural gas to more than 7.8 million customers in central Maryland, northern Illinois and southeastern Pennsylvania.
Exelon investors receive a 3.61% dividend. Deutsche Bank has a $34 price target, but the consensus target is higher at $36.14. The stock closed Friday at $34.37.
With a very strong balance sheet, this company is poised for a solid rest of 2016. NextEra Energy Inc. (NYSE: NEE) is a leading clean energy company with consolidated revenues of over $17.0 billion and approximately 44,900 megawatts of generating capacity, which includes megawatts associated with noncontrolling interests related to NextEra Energy Partners.
Headquartered in Juno Beach, Fla., NextEra Energy’s principal subsidiaries are Florida Power & Light Company, which serves approximately 4.8 million customer accounts in Florida and is one of the largest rate-regulated electric utilities in the United States, and NextEra Energy Resources, which, together with its affiliated entities, is the world’s largest generator of renewable energy from the wind and sun.
NextEra Energy expects a compounded annual growth of 6% to 8% in its adjusted earnings per share through 2018. It is aggressively raising its renewables portfolio with a focus on wind generation facilities. It is already the largest power generator by both wind and solar energy in the Unites States. By 2019, the company expects to invest about $15 billion, particularly to add both wind and solar generation facilities. Given the strong focus on regulated operations, NextEra’s earnings are expected to rise steadily. Earnings from regulated operations rose from 58% in 2011 to 66% in 2015.
NextEra investors are paid a 2.9% dividend. The Deutsche Bank price objective is $118. The consensus price target is $124.41. Shares closed Friday at $117.43.
The mere fact that the macroeconomic setting could hold back the Federal Reserve from increasing rates more than once or twice this year puts a nice tailwind behind these top stocks to buy. They should also continue to have very solid total return potential. It should be noted though, that the big capital gains returns may be over, and returns could easily be lower in the future.