Calling a spade a spade, utility stocks are boring. They don’t cure cancer, they don’t enthrall consumers and they don’t grow leaps and bound at a time.
Ergo, they rarely earn a spot on an investor’s list of must-have stocks to buy.
And yet, utility stocks quietly offer an amazing upside. Aside from steady-Eddie dividends, utility stocks tend to move out of sync with the rest of the market, providing a safe haven when most other stocks are struggling.
For instance, since the Nov. 2 peak, the average utility stock has gained more than 6%, while the S&P 500 has lost close to 9% of its value.
With that as the backdrop, here’s a closer look at three of the market’s best utility stock to buy sooner than later, based on value, dividend reliability and opportunity. In no certain order…
Best Utility Stocks to Buy: Duke Energy Corp (DUK)
While size isn’t inherently a sign of strength, within the utility sector, the biggest name is also one of the best stocks to buy. That’s Duke Energy Corp (DUK), weighing in with a market cap of $51.6 billion.
Duke Energy delivers 57,500 megawatts of electricity to 7.3 million customers, most of whom are in the midwestern and southeastern United States. It has been in business for over a century, has impressively grown its EBITDA for five straight years and has been enviably reliable in terms of earnings and revenue growth for a decade. It’s also been a reliable dividend payer that whole time, and today’s buyers would enjoy a 4.4% yield on their money (and can look forward to steady increases in their payouts).
Those who know Duke Energy well will recall that JPMorgan recently cut its rating on DUK shares to “neutral” on concerns that its core business was struggling, as reflected in the dialed-back guidance for 2016. The company also missed last quarter’s earnings estimates due to mild winter temperatures and is facing a wave of regulatory headwinds, including claims of unlawful charges to its Florida customers and a potential hurdle with its proposed natural gas plant upgrade in Asheville, North Carolina.
Those who’ve kept tabs on DUK for the long haul, however, know none of these things are unusual, and few of them slow the company’s growth down for any length of time.
Best Utility Stocks to Buy: American Water Works Company Inc (AWK)
While electric utilities are well regulated and are required to be price-competitive (because alternative suppliers are available), water utility stocks simply don’t face the same level of legal and competitive hurdles. There are no water wholesalers to create a competitive environment, and acquisitions within the water utility world just don’t happen at the same fervor electricity utility deals do.
This reality pretty much lets water utility companies write their own ticket in whatever communities they operate in.
And one of the top names in water is American Water Works Company (AWK).
American Water Works serves 15 million people in more than 45 states, as well as in some parts of Canada. And, while it has been business as usual for the past few years, 2015 revealed some major problems with the United States’ water infrastructure that play right into the hand American Water Works is holding.
That problem? The contaminated water crisis in Flint. Michigan, which as it turns out is just a microcosm of what’s going on all across the country.
Fine, but why does that make AWK one of the better utility stocks to buy?
Because, being one of the biggest and best-funded players in the industry, it’s able to bring the capital it needs to the table to create solutions. In that such infrastructure repairs are ultimately approved by regulators, those regulators are generally more than happy to proverbially hand the keys over to American Water Works.
It’s a big deal, as — generally speaking — regulators authorize an ROE of around 10% of the total amount spent on upgrades. Given the amount of spending the nation needs to take on to adequately repair its water infrastructure, 2016 could be the beginning of a perfect earnings storm for AWK.
And make no mistake … American Water Works was already spending money to make improvements all over the nation. It was on pace to spend $1.2 billion on waterworks systems in 2015. Presumably, 2016 will see similar initiatives.
Best Utility Stocks to Buy: AES Corp (AES)
Last but not least, among the lesser-known (or unknown) names within the utility sector, AES Corp (AES) may be the best of the breed for two reasons: (1) it’s geographically diversified, with a presence in 17 countries on four continents, and (2) it’s operationally diversified, creating electricity using everything from natural gas to coal to wind to biomass, and more.
It’s not a giant. Its market cap is a modest $6.9 billion, which may be why investors overlook or dismiss it as an investment. Its limited dividend history may also be a concern to would-be buyers.
Its small size hasn’t been a liability, however. Indeed, its small size has allowed it to be nimble, navigating the still-rocky landscape of clean-energy initiatives with considerable efficacy. It’s this foray into clean energy, in fact, that makes AES one of the truly great utility stocks to buy.
Case in point: Last week, AES unveiled its Advancion Energy Storage array in the Netherlands, providing some much-needed proof that the erratic production of renewable energy can be stabilized with battery-based solutions. Once it’s validated as a proof of concept, look for the market to demand more of the same in other locales.
In the meantime, AES shares can be bought for a mere 9.1 times its forward-looking earnings, and it pays a decent 4.7% yield (and can more than afford to pay it).
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
