The Zacks Utility – Electric Power industry stocks have been transitioning toward clean sources of fuel and focusing on lower carbon emissions. The introduction of the Inflation Reduction Act 2022 should support the industry’s transition toward clean energy sources to produce electricity. Utilities are also focused on strengthening the grid as well as transmission and distribution infrastructure. The huge infrastructure of the utilities faces the impact of the hurricane season each year. Infrastructure enhancement around the year increases the resilience of the entire system, reduces outages and allows operators to restore power quickly for customers affected by storms.

NextEra Energy, with large renewable operations and well-chalked-out capital investments to strengthen infrastructure, offers an excellent opportunity to stay invested in the utility space. Other utilities worth adding to your portfolio are Exelon Corp., Consolidated Edison and DTE Energy Co.

About the Industry

The Utility – Electric Power industry involves the process of generation, transmission, distribution, storage and sale of electricity to customers. A substantial portion of utilities’ earnings is generated from regulated operations. Unless there is any major weather variation, demand for the services provided by utilities remains more or less steady, regardless of economic cycles. Per the EIA report, mild weather during 1H23, will likely reduce usage by 2% year over year.

A clear transition is evident in this industry, with more companies declaring zero-emission goals on their own. Research and development over the years have resulted in a substantial decline in the cost of setting up utility-scale renewable power projects, aiding in the reduction of emissions. However, the ongoing increase in interest rates is a concern for capital-intensive utilities.

3 Electric Power Industry Trends to Watch Out For

Transition Toward Cleaner Sources to Generate Power:  The operators in the U.S. electric power sector are gradually moving toward cleaner sources of energy to produce electricity. Per the U.S. Energy Information Administration (EIA), the annual share of U.S. electricity generation from renewable energy sources will rise from 22% in 2022 to 23% in 2023 and is expected to touch 25% in 2024, as a result of the continuing addition of solar and wind-generating capacity.

The expansion of renewable energy continues to eat into the share of coal in electricity generation. EIA expects coal contribution to electricity generation to fall from 20% in 2022 to 16% annually in 2023 and further to 15% in 2024. The passage of the Inflation Reduction Act (IRA) will support and accelerate the utilities’ transition toward clean energy sources.

The IRA has removed the uncertainties relating to federal incentives provided for renewable sources usage. The act entails an opportunity for a wide range of low-cost clean energy solutions in a predictable way for a long time and will create earnings visibility. Courtesy of IRA, the utility operators are planning to add more renewable assets to their generation portfolio and shut down old polluting units.

Demand for Electricity Stable: Per EIA, electricity demand in the United States can drop 2% year over year in 2023 but increase by 2% in 2024 to touch the 2022 levels. EIA believes that the expected drop in demand for electricity in 2023 will be due to a milder summer forecast that would lead to less requirement for cooling. Despite the expected drop in consumption, the utilities will continue to add new renewable energy assets to the total generation portfolio.

Ongoing Interest Rate Increase is a Concern: Utilities, in order to maintain, upgrade and expand operations, approach capital markets for loans. The utilities have been enjoying near-zero interest rates for the past few years. But multiple rate hikes in 2022 pushed up interest rates. Even though the Federal Reserve decided not to increase interest rates in its last meeting, the benchmark rate is high at a range of 5-5.25%.

Fed officials are contemplating increasing rates once more in their scheduled July meeting. The increasing interest rates are a concern for capital-intensive utilities in the United States as these will push up capital servicing costs substantially from the current levels. Utilities might try to pass on the burden of increasing borrowing costs to customers but the necessary increase in rates might not be approved by the commission. In such a scenario, utilities will need to digest the extra expenses, which can lower their profitability and make them less attractive to investors interested in the utility space.

Zacks Industry Rank Indicates Rosy Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates strong near-term prospects. The 56-stock Utility-Electric Power industry is housed within the broader Zacks Utilities sector and currently carries a Zacks Industry Rank #72, which places it in the top 29% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the earnings estimate revisions, it appears that analysts are showing confidence in this group’s earnings growth potential.

Before we present a few Utility – Electric Power stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and current valuation.

Industry Lags S&P 500 But Beats Sector

The Utility Electric Power industry has lagged the Zacks S&P 500 and its own sector over the past 12 months. The industry has declined 5%, narrower than its sector’s drop of 5.1%. The Zacks S&P 500 composite gained 14.5% in the same period.

Industry’s Current Valuation

On the basis of EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) TTM, which is a commonly used multiple for valuing Utility Electric Power companies, the industry is trading at 18.22X compared with the S&P 500’s 13.73X and the Utility sector’s 18.33X.

Over the past five years, the industry has traded as high as 20.59X, as low as 10.43X and at the median of 13.34X.

4 Electric Power Industry Stocks to Focus On

NextEra Energy: Juno Beach, FL-based NextEra Energy is engaged in the generation, transmission, distribution and sale of electric energy. The company expects capital deployment in excess of $54 billion in different projects from 2013-2027. These investments will be directed toward modernizing and strengthening the existing infrastructure and generating more electricity from clean sources to lower carbon emissions.

NEE’s long-term (three to five years) earnings growth is pegged at 8.38%. The current dividend yield for NEE is 2.55%, which is better than the Zacks S&P 500 Composite group’s average of 1.66%. The Zacks Consensus Estimate for NextEra Energy’s 2023 earnings reflects year-over-year growth of 7.24%.  NextEra Energy currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Exelon Corporation.: Chicago, IL-based Exelon Corporation focuses on the transmission and distribution of electricity. EXC has plans to invest $31.3 billion in different projects in the 2023-2026 time period. EXC’s current dividend yield is 3.43%. EXC’s long-term earnings growth rate is pegged at 6.68% The Zacks Consensus Estimate for Exelon’s 2023 earnings per share reflects a year-over-year increase of 3.96%.Exelon currently has a Zacks Rank #2.

Consolidated Edison, Inc.: New York-based Consolidated Edison, through its subsidiaries, is engaged in regulated electric, gas and steam delivery businesses. The company has a capital expenditure plan of $14.6 billion for the 2023-2025 period. ED’s current dividend yield is 2%. The Zacks Consensus Estimate for Consolidated Edison’s 2023 earnings reflects year-over-year growth of 6.81%. ED’s long-term earnings growth is pegged at 3.48%. Consolidated Edison currently has a Zacks Rank #2.

DTE Energy: Detroit, MI-based DTE Energy Company, along with its subsidiaries, is engaged in regulated and unregulated energy businesses. DTE Energy aims to spend $21.6 billion during the 2023-2027 time frame to strengthen its electric and natural gas operations. DTE’s current dividend yield is 3.37%. DTE’s long-term earnings growth is pegged at 6%. The Zacks Consensus Estimate for DTE Energy’s 2023 and 2024 earnings per share reflects year-over-year growth of 1.5% and 7.5%, respectively. DTE Energy currently has a Zacks Rank #2.

Exelon Corporation (EXC): Free Stock Analysis Report

NextEra Energy, Inc. (NEE): Free Stock Analysis Report

DTE Energy Company (DTE): Free Stock Analysis Report

Consolidated Edison Inc (ED): Free Stock Analysis Report

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