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3 Utility Stocks With Tried-and-True Gains

Muslim Farooque
·4 min read

The utility sector comprises companies that provide essential products and services, including water, electricity, natural gas, sewage, and other services. The sustained demand for these services has helped utility stocks generate stable earnings.

Due to the reliability of earnings, these companies can effectively payout dividends at significantly higher average yields. Hence, the unmatched combination of income generation and profitability makes utility stocks an excellent low-risk option for investors.

This year, the utility stocks represented by the Utilities Select Sector SPDR ETF (NYSEARCA:XLU), have underperformed the broader market. The S&P 500 index grew 6% since the beginning of the year, while the Utilities ETF fell by nearly 2%.

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Tech stocks have ruled the roost this year, but utility stocks’ importance in a well-rounded portfolio cannot be denied either. Therefore, let’s look at three utility stocks that remained resilient despite the effects of the pandemic.

  • American Water Works (NYSE:AWK)

  • AES Corporation (NYSE:AES)

  • NextEra Energy (NYSE:NEE)

Utility Stocks: American Water Works (AWK)

a picture of water
a picture of water

Source: Shutterstock

American Water Works provides regulated water and wastewater services to homeowners and the military. It is currently the largest water and wastewater utility company in the U.S.

Additionally, it also makes money using specific market-based activities. It remained resilient in the face of the pandemic, as AWK stock grew 13.7% relative to the S&P 500.

It recently reported its solid second-quarter results. Earnings per share (EPS) for six months ended June 30 was at $1.65, roughly 5.8% compared to the prior-year period. Income from its regulated business was $177 million, compared to $156 million in the same period last year.

Additionally, income from market-based activities also increased by $2 million. Despite the slowdown in water usage in the country, the increase in prices has helped offset revenues’ impact.

Moreover, the directors announced a quarterly cash dividend payment of 55 cents per share. Hence, the dividend growth rate for the past year for the company is around 10%. American Water Works expects to grow its EPS and dividends at a compound annual growth rate (CAGR) between 7% to 10% from 2019 to 2024.

NextEra Energy (NEE)

Nextra Energy (NEE) website on a mobile phone screen
Nextra Energy (NEE) website on a mobile phone screen

Source: madamF / Shutterstock.com

NextEra Energy is the most valuable energy company in terms of market capitalization in the U.S. It runs regulated electric utilities in Florida and a nonregulated energy business operating natural gas and renewable energy projects.

Additionally, it boasts one of the most robust financial profiles in the sector, with the highest credit ratings among businesses of its kind. NEE stock’s 12-month return relative to the S&P 500 is at a healthy 19.3%.

The company reported its second-quarter results back in July, which was weighed down by the pandemic. The adjusted EPS for the quarter was at $2.61, surpassing expectations by 4.4%. However, revenues were down 15.4%. Revenues across all its segments lagged behind consensus estimates. Nevertheless, the company’s earnings are expected to grow at a CAGR of 6% to 8% per year through 2021.

Its financial strength continues to impress as cash and cash equivalents were up 268% crossing the $1 billion mark. Moreover, the company plans to increase its dividend by approximately 10% per year through 2022.

AES Corporation (AES)

multiple powerline towers are shown against a sunset and a distant city skyline
multiple powerline towers are shown against a sunset and a distant city skyline

Source: zhao jiankang / Shutterstock.com

AES is one of the largest electric utility companies in the U.S. operating in multiple nations. It has one of the most diversified portfolios of distribution and electricity generation businesses.

Additionally, it is among the top electric utility companies leading the charge towards renewable energy. AES stock’s 12-month return relative to the S&P 500 is at a solid 10.9%.

The pandemic weighed down the company’s second-quarter results. Adjusted EPS was down 3.8% to 25 cents while revenues dropped 11.3%. Despite the slowdown, the management feels that market demand is better than their expectations, and collections are in line with historical levels. The company expects a 7% to 9% average growth rate for its business through to 2022.

AES is betting heavily on the green revolution and hopes to generate less than 10% of its electricity from coal by 2030. It is aggressively retiring its coal plants and remains focused on increasing its renewable plants.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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