Utility stocks are looking attractive after wandering in the wilderness for the past couple of years due to high inflation and interest rates.
High prices caused pushback on utility rate increases, while the capital-intensive nature of their operations left them languishing in the high interest rate environment. It costs a lot of money to maintain, upgrade and build utility infrastructure, and the historically high rate environment significantly increased borrowing costs.
But with inflation somewhat muted compared to the 40-year highs it hit and the prospects for interest rate cuts growing, the best utilities stocks are primed for growth. Energy consumption by data centers is soaring, becoming an incredibly unique growth opportunity for the sector.
Utilities have long been seen as widow-and-orphan investments because of their stability and the reliability of their income payments. With the cost and demand environment shifting in the industry’s favor, these are the three best utilities stocks to buy now.
Entergy (ETR)
Located in the southeast region of the U.S., Entergy (NYSE:ETR) is primed to benefit from the ongoing data center buildout trend underway. Because utility rates tend to be lower in this region than elsewhere in the country, hyperscalers like Meta Platforms (NASDAQ:META) are constructing new facilities there. Meta is building a new $800 million data center campus in Montgomery, Alabama.
Entergy is also in the middle of a capital expenditure program. It is spending nearly $2 billion in Louisiana to upgrade its electric grid infrastructure to make it more resilient. In a bid to bolster its transmission lines and distribution system, the utility stock is eying some 2,100 separate projects to reinforce critical structures. And this is just the first phase of a multi-phase process to improve its systems. Two years ago it unveiled a $25 billion capital plan to cover all of its service areas.
The market already likes what it sees. Entergy stock is up 15% in 2024 and stands 20% higher over the past year. With a dividend yielding 3.8% annually, investors in the best utilities stocks like ETR will benefit handsomely down the road.
Duke Energy (DUK)
Similarly situated is one of the largest regulated utilities in the country, Duke Energy (NYSE:DUK). Although best known for its service in North Carolina, its largest market, Duke also has a substantial presence in Florida.
Duke is installing 300 megawatts (MW) of solar annually. It plans to have as much as 1,500 MW of utility-owned solar in service in Florida by the end of the year. It further expects to more than triple the amount of solar power in operation by 2033. As noted, North Carolina is Duke’s most important market and it plans to install 1,500 MW of solar annually for the next 10 years beginning in 2027.
As is apparent, Duke is working towards a net-zero carbon emissions footprint by 2050. Renewable energy is a critical component of its plan, and the utility is willing to spend up to $73 billion between 2024 and 2028 to help achieve it.
Duke Energy is looking for its per-share profits to grow 5% to 7% annually through 2028. In the second quarter, it reaffirmed its full-year earnings outlook of $5.85 to $6.10 per share. That implies 7% growth at the midpoint.
Consolidated Edison (ED)
New York-based Consolidated Edison (NYSE:ED) is the third of the best utilities stocks to buy in August.
Providing electricity, natural gas and steam to 10 million customers in New York state, ConEd, as the utility is known, is one of the largest publicly traded energy-delivery companies. Unlike Duke, though, ConEd has largely abandoned its renewable energy efforts. It sold off those assets last year for $6.8 billion. Instead, it is investing in offshore wind energy projects.
ConEd’s rate regulation has markedly improved. Its largest division, Cecony, operates under a revenue decoupling framework. That means its profits are disassociated from its electricity sales. Rather, it is given a rate of return in line with meeting revenue targets. Rates are also set for three years, giving the utility plenty of clarity into its growth potential.
The utility’s much smaller unit, Orange & Rockland, also has a revenue decoupling arrangement.
Consolidated Edison’s stock is up 11% year-to-date. It also pays a dividend that yields 3.2% annually. ConEd has been in business for over 200 years and has paid a dividend for more than a century. It has increased the payout for 46 consecutive years.
On the date of publication, Rich Duprey held a LONG position in ED stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
