Our top picks in this sector are NiSource, Entergy, and WEC Energy Group.
Travis Millerand Andrew Bischof, CFA
Securities In This Article
Utilities have been caught in a rinse-and-repeat cycle over the past two years. In both 2022 and 2023, utilities’ stock prices slowly rolled downhill before rallying in the fourth quarter to trim the losses. Since 2021, only dividends have kept investors here afloat. We think utilities are better positioned going into 2024 to produce the steadier positive returns that investors expect.
Our top picks among utility stocks are:
- NiSource NI
- Entergy ETR
- WEC Energy Group WEC
Earnings and dividend growth throughout 2022 and 2023 have rinsed out what we considered absurdly high valuations in 2019-20, while stock prices treaded water. Valuations across the sector have converged as fundamentals improved. Most utilities enter 2024 trading near their long-term historical market valuations and within 10% of our fair value estimates.
We think strong balance sheets, secure dividends, and robust long-term growth opportunities should support premium valuations for many utilities. However, some headwinds could stunt that growth. Regulators are closely watching customer bills, and customer rate increases will be difficult to justify. Higher interest rates could pressure high-growth utilities that need to raise new debt to fund their growth investments.
We think the best-positioned utilities are those in regions with strong energy demand growth and widespread support for clean energy investments. Parts of the Southeast and Midwest check those boxes for now.
Utilities have been fighting the market’s inconsistent outlook on the interest rate for the past two years. Rising interest rates have compressed valuations and made utilities’ dividends less attractive on a relative basis. Ultimately, we think the sector can mitigate some of that sensitivity as firms execute their growth plans, including huge investments in clean energy over the next decade. That could help investors focus on fundamentals rather than short-term swings in interest rates.
Top Utilities Sector Picks
NiSource
- Fair Value Estimate: $33.00
- Morningstar Rating: 5 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Low
Though NiSource trades at a similar valuation as its peers, we think it has a superior runway of growth and deserves to trade at a premium. NiSource’s transition from fossil fuels to clean energy in the Midwest supports at least a decade of faster growth than the sector average. We expect NiSource to invest $15 billion over the next five years and as much as $30 billion during the next 10 years, leading to 7% earnings growth and similar dividend growth. Its electric utility plans to close its last coal-fired power plant in 2028 and replace the generation with wind, solar, and energy storage. Its six gas utilities have ample near-term investment and regulatory support in regions that are unlikely to abandon gas.
Entergy
- Fair Value Estimate: $120.00
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Low
Entergy offers one of the most attractive combinations of yield, growth, and value in the utilities sector, with a dividend yield above 4% and the potential for 7% annual earnings growth. Above-average electricity demand growth, clean energy investments, and reliability/resiliency network investments are core growth drivers. Entergy also should benefit from industrial carbon emissions cuts, global energy demand, and green hydrogen development. We expect Entergy’s valuation discount to disappear as the market becomes comfortable with Entergy’s decadelong business transformation away from commodity-sensitive businesses.
WEC Energy Group
- Fair Value Estimate: $96.00
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Low
WEC combines best-in-class management and above-average growth opportunities supported by constructive regulation across most of its jurisdictions. The company increased and updated its capital plans, anticipating spending of $23.4 billion, a $3.3 billion increase from its prior program. WEC will increase investments in renewable generation, natural gas generation, and transmission due to significant economic development in southeastern Wisconsin. This supports our 7.0% growth estimate, at the high end of management’s 6.5%-7.0% guidance range.
The author or authors do not own shares in any securities mentioned in this article.Find out about Morningstar’s editorial policies.
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About the Authors
About the Authors
Travis Miller
Strategist
Travis Miller is a strategist, AM Resources, for Morningstar*. He covers energy and utilities. North American regulated utilities and independent power producers have been the main focus of his research for more than 17 years. The companies in his coverage include some of the largest U.S. utilities as well as a mix of small- and mid-cap utilities.
Before joining Morningstar in 2007, he was a reporter for several Chicago-area newspapers, including the Daily Herald in Arlington Heights, Illinois. Previously, Miller was director of the utilities equity research team at Morningstar.
Miller holds a bachelor’s degree in journalism from Northwestern University’s Medill School of Journalism. He also holds a master’s degree in business administration from the University of Chicago Booth School of Business, with concentrations in accounting and finance. He is a Level III candidate in the Chartered Financial Analyst® program.
* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc
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Andrew Bischof, CFA
Strategist
Andrew Bischof, CFA, CPA, is a strategist, AM Resources, for Morningstar*. He covers electric, gas and water utilities. He conducts comprehensive research and analysis on his covered companies to provide insights into investment opportunities. He assesses financial statements, competitive advantages, and economic indicators to determine a stock’s intrinsic value. He is a five-time Morningstar Outstanding Research Achievement award winner, which recognizes thought leadership and equity research quality as voted on by senior management.
Before joining Morningstar in 2011, Bischof worked in treasury for Mead Johnson Nutrition. Previously, He was a group audit officer for Bank of America in Chicago, and before that, an auditor for Ernst & Young.
Bischof holds a bachelor’s degree in business administration and accounting and a master’s degree in accounting from the University of Wisconsin. He also holds a master’s degree in business administration, with a concentration in finance, from Indiana University’s Kelley School of Business. Additionally, he holds the Chartered Financial Analyst® and Certified Public Accountant designations.
* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc
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