One thing is for sure on Wall Street, it takes two to have a horse-race, and there is never any lack of viewpoints when it comes to sectors and stocks. While some firms see bond proxies like utilities, consumer staples and telecoms overbought and ready for a fall, others see the sectors, especially utilities, as still a good play in a world where bond yields remain low and there is a fair amount of global macro issues causing unease around the investing world.
A new Deutsche Bank research report acknowledges that the utility sector has had a great run this year, up about 20%. It also notes that the price-to-earnings premium of about 7% is way below prior peaks of 20% and more that were recorded during the crash in 2008 and the period between 2011 and 2012. Deutsche Bank also says that stocks that provide solid single-digit growth and yields between 3% and 4% remain attractive.
We screened the Buy-rated stocks in the Deutsche Bank utility universe and found three that make good sense now.
American Electric Power
This industry leader is also a solid dividend-paying company that only 10.2% of funds own. 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 3.21% dividend. The Deutsche Bank price objective was raised to $72 from $68. The Wall Street consensus target is $71.39. Shares closed on Monday at $69.77.
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 3.4% dividend. Deutsche Bank raised its price target to $39 from $36. The Wall Street consensus is $37.59, and the stock closed Monday at $37.50.
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.
Top analysts feel the company may very well be one of the top total return plays out of the large cap regulated space in the sector. However, it was just announced that the company’s proposed takeover of Hawaiian Electric Industries was rejected by regulatory authorities, after nearly two years since its initial filing. The rejection has led the parties to call off the merger.
Shareholders are paid a 2.7% dividend. Deutsche Bank raised the price target to $134 from $123, and the consensus target is $133.94. The stock closed Monday at $129.49.
Again, the sector is rich, and we just ran a piece with a list of dividend stocks investors could buy with the profits from selling utilities. Deutsche Bank is very possibly correct in its overall thesis, and while it remains cautiously optimistic on some of the top companies, most in the firm’s coverage universe are rated Hold.