What’s the best utilities stock play right now for investors?
Seeking Alpha analysts Power Hedge, Kody’s Dividends, and Wolf Report gave us their picks.
Power Hedge: One of the major driving forces for utility sector gains over the past year or two has been the construction of numerous data centers that are intended to provide the infrastructure needed for generative artificial intelligence.
Thus far, this trend has mostly benefited electrical utilities, but there could also be potential in natural gas utilities. Texas is now requiring all data centers to have their own on-site power generation, and the Trump administration appears to be encouraging data centers in other states to do the same to avoid substantial price hikes on everyday consumers.
One way to generate power on-site is by putting a natural gas turbine on the data center premises. Natural gas utilities with operations in Texas or Virginia, such as Atmos Energy (ATO) or NiSource (NI), could be beneficiaries here, and they have more attractive valuations than most electric utilities.
Kody’s Dividends: While NextEra Energy (NEE) remains the high-quality titan of its industry, its recent rally has eroded the margin of safety, with it trading near my fair value estimate.
For the best utility play right now, I prefer Xcel Energy (XEL). It’s a Dividend Aristocrat in the making, trading nearly 10% below my fair value estimate with a clear path to 9% annual ongoing diluted EPS growth through 2030, fueled by a massive data center pipeline.
I’m pairing it with Essential Utilities (WTRG). As a Dividend Champion with 30+ years of dividend raises, now is the time to buy this top-notch water utility at a double-digit percentage discount to my fair value estimate.
Wolf Report: While much of the current utility sector (at least multi-utilities, most of them on an international basis) is either fully valued or overvalued, I see value in U.K.-based National Grid (NGG), with a near-4% yield and a higher, double-digit growth rate yet still only a 16x normalized P/E. It’s not as exposed to renewables as some other players, it has attractive and multinational exposures, and it’s unlikely to face significant near-term serious hurdles.
Otherwise, the combination of a rising interest rate environment, increasing climate change impact, and rising regulatory risk (as well as renewable risk) has taken some of the shine off many utility stocks.
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