January 30, 2023
NextEra (NYSE:NEE), Southern Company (NYSE:SO), and Entergy (NYSE:ETR) are the three top utility stocks recommended by professional equity analyst Travis Miller, an Energy and Utilities Strategist for Morningstar Research Services.
Mr. Miller holds a bachelor’s degree in journalism from Northwestern University’s Medill School of Journalism and a master’s degree in business administration from the University of Chicago Booth School of Business, with concentrations in accounting and finance.
In this exclusive 2,071 word interview in the Wall Street Transcript, Travis Miller, Mr. Miller details how growth and income can both be found in the utilities sector.
“The Southeast right now appears to be one of the most constructive areas for utilities.
Within that, NextEra (NYSE:NEE) appears very well positioned to grow, given almost 80% of their earnings come from Florida.
We also like Southern Company (NYSE:SO) and Entergy (NYSE:ETR), both located in the Southeast where you have higher-than-average population growth.
We also see generally lower energy costs in the Southeast. There’s a lot of growth opportunity in that region to expand the clean energy mix…
We think the Northeast is going to be exceptionally challenging, both this winter and going forward for the next few years.
From New York up through New England, there’s a scarcity of natural gas. So we expect much higher energy prices this winter and next summer.
Those states also have very aggressive clean energy goals.
When you put together the high and rising energy costs along with the infrastructure investment that’s needed to meet the clean energy goals, we see some rapid escalation in customer bills that utilities are going to have to manage.”
Nuclear power generation may also be riding the clean energy wave despite the closing of the Yucca Mountain waste disposal site by the adminstration of President Obama.
“Most utilities have some type of nuclear exposure, either owning facilities or distributing power from nearby facilities.
Nuclear is a hotly debated topic in the clean energy industry because arguably it offers the most reliable carbon-free power generation available.
That said, there’s been a lot of concern over the years about safety and about nuclear fuel waste handling.
I think we’ve seen, just in the last year, a big mentality shift as people start to run the numbers in terms of getting to 50%, 60%, even 100% carbon-free power generation mix.
You just can’t do it in a reasonable amount of time without nuclear.
Nuclear is still 20% of the U.S. generation mix and it’s the most reliable source of generation in many areas.
The best example is what’s happened in California over the last few months as the Governor’s office and other energy policy makers reversed PG&E’s (NYSE:PCG) decision to retire the Diablo Canyon nuclear plant.
As policy makers in California ran the numbers about how to get to net zero emissions by 2045, Diablo Canyon became a key part of that equation.”
Two more top picks from Travis Miller beyond NextEra (NYSE:NEE), Southern Company (NYSE:SO), and Entergy (NYSE:ETR) are Edison International (NYSE:EIX) and WEC Energy Group (NYSE:WEC).
“One of our top picks is Edison International (NYSE:EIX), which operates the electric grid in most of Southern California.
The big growth story for Edison is that California is aiming to electrify all of its transportation fleet and all of its buildings within the next 20 years to eliminate carbon emissions across the economy.
California’s net zero emissions goals are much more ambitious than any other state.
There’s general consensus among stakeholders in California that utilities like Edison will be essential to support that clean energy transition in terms of providing the electricity for vehicles and for buildings and also ensuring that the grid is reliable and resilient as more demand for electricity comes onto the system.
For Edison that means a lot of electricity demand growth and a lot of infrastructure growth.
Edison International also has one of the lowest valuation multiples and one of the highest dividend yields in the sector right now.
So we think Edison offers an attractive income source as well.
The market’s biggest concern with Edison is an unresolved liability related to past natural disasters that continue to impact both accounting earnings and cash flow. We don’t expect that to be resolved anytime soon. But their core business continues to perform very well…
we think that WEC Energy Group (NYSE:WEC) is a very attractive company for traditional utility investors looking for income, growth and stability.
WEC operates in Wisconsin primarily, which we consider a highly constructive state. It’s also moving very quickly to diversify its energy mix, in particular, adding renewable energy.
State regulators have been very supportive of WEC’s growth plans in areas like solar and wind.
So we see a lot of growth there and support from regulators to ensure that growth turns into earnings and dividends for investors.
WEC has always had very, very consistent earnings.
Their management team is one of the few that offers a very tight window on earnings guidance for the upcoming year and they regularly meet or exceed that guidance.”
The Morningstar analyst sees some challenges to utility stocks such as NextEra (NYSE:NEE), Southern Company (NYSE:SO), and Entergy (NYSE:ETR).
“I think beyond the clean energy transition, which continues to get support at state and at the federal level, the growth of electric vehicles is really going to be a key trend for utilities over the next five years.
Electric vehicle charging in the homes and businesses is going to shift some of the way energy infrastructure historically has been used for the last century.
That’s going to require some more modernization investments and it’s going to require more infrastructure investments.
It could significantly change the way utilities build and operate the electric grid over the coming decade.
At the federal level, we think most of the policymaking has been done through both the infrastructure bill that was signed last year and the Inflation Reduction Act.
So we don’t see a whole lot of federal policy making changes in the next few years.”
Get the full detail on Morningstar analyst Travis Miller top picks NextEra (NYSE:NEE), Southern Company (NYSE:SO), and Entergy (NYSE:ETR) by reading the entire 2,071 word interview, exclusively in the Wall Street Transcript.