The King of the Hill
At this moment my favorite utility stock is Evergy Corp. - EVRG - $58. It is an electric utility with operations in Kansas and Missouri. At a current stock price of $58 it has a 4.2% yield and a P/E ratio of 16.5x trailing earnings. EVRG’s main advantage is a simple structure with no non-regulated assets and regulatory authorities that have already put quite a bit of wind generation into the rate base. EVRG seems to well managed and has a solid balance sheet.
As I looked through many utility company presentations I realized how complex the industry has become. Every company is taking a different approach to “green” energy issues. Right now, in this industry, I think simpler is better. To me the risk is to the downside if some of the “green” plans are not economic. We will often take the low risk approach, and here it is certainly warranted.
In the typical approach to presenting investment analysis online I would now write a detailed 4-20 page report trying to convince you that EVRG is the greatest utility in the history of mankind. That is not the case, there are many utility stocks that warrant consideration, and reasonable people could disagree. What is more important is to discuss the 10 stocks I did not choose, and why I preferred EVRG.
Let’s consider the alternatives:
Dominion Energy - D - $60 - D had been the Wall Street favorite, but it has significant risks in it’s offshore wind plans. With a yield of 4.4% and a PE of 15, I am tempted by all the negative Wall Street reports, but the sprawling $60 billion dollar company is just too complex. The CFO just left, and that is never a good sign. I need a bigger discount to take on these issues.
Entergy - ETR - $113 yThis is the old Middle South Utilities based in New Orleans. ETR has more upside than almost any other utility because of the need to electrify the natural gas processing businesses on the Gulf coast. However, fast growing rate bases can be difficult to manage. This is one to watch carefully, the yield is 3.8% and the PE is 18 and Wall Street has 14 buy recommendations (compared to 5 for Dominion), so expectations are high.
Avangrid - AGR - $42. Every utility investor should at least consider Avangrid. AGR is a weird company, and I usually embrace weirdness. AGR is 81% owned by the Spanish utility giant Iberdrola. This can be a positive or a negative. The stock sells for under 90% of stated book value. I would be more interested but AGR has been trying to buy Public Service of New Mexico, often commonly called Public “serpent” of New Mexico for its 20 year battle with its regulator. I want to learn more, but for now this is a pass.
NorthWestern Corp - NWE - $57 This is what is left of the old Montana Power. I used to own Montana Power when they owned telecom assets that were someday going to used in this new thing called the Internet. I am very old. NWE sells for only 1.3x book value, well below most utilities. The company has coal plants it needs to close, and new capacity to build. There are too many “moving parts” here. Wall Street has only 3 buy recommendations, so the enterprising investor might find gold by digging deeper. I want to learn more.
Pinnacle West Capital - PNW - $76 This is the old AZP Group (Arizona). This company is a clear example of the problems of a growing rate an an unfriendly regulator. If it is yield you want, you can get 5.6% here. I hate to value stocks using yield, but with utilities it is acceptable. This really this highest risk utility available, and the premium is not that big. I do notice that the very smart value investors at Barrow, Hanly, Mehwinney and Strauss own 5% of this stock, so I am willing to give it a second chance. I want to learn more.
Vistra Energy - VST - $24. When I look for low PE utility stocks this name jumps off the page at only 12x. However, on further investigation it does have utility operations, but is primarily a merchant power producer. That might be good or bad, but this is no utility. This stock needs to be examined separately. It is more than mildly interesting that the company makes few financial disclosures, yet is buying it’s stock pack at a rapid rate. I really need to learn more.
Allete - ALE - $66 This used to be Minnesota Power. Usually you can find some interesting small cap names at the bottom of a 100 stock list, but I was disappointed not to find much in the utility space. I guess the decent small utilities have all been consolidated into bigger companies. Allete is now fairly valued, but only a few months ago the stock was $50. It shows how some good regulatory news cane effect a stock (and maybe some momentum investors too). This is still a $3 billion dollar stock. I wish I could find a better small cap.
Northwest Natural Holding - NWN - $49 If you want to avoid all the coal exposure of the electric industry you can always hide in the natural gas distribution business. There are only about 5-7 pure natural gas utilities left. There are some interesting companies to consider in this group, but stocks like National Fuel Gas and UGI are not really utilities. With natural gas prices near all-time highs, I want to be careful here. NWN is a sleepy pure distributor, but I do not really trust Oregon regulators. The yield is a decent 3.9% and the PE is a little steep at 19x. Sometimes “sleepy” is ok, but I need a cheaper price here.
Essential Utilities - WTRG - $47 Water utilities are really a religion, not a group of stocks. There are about 12 of them to keep track of. These stocks are always expensive. It almost impossible for a value investor to find a stock here. It interesting how successful American Water Works has been. The company is an interesting case study. At 26x for WTRG, I will have to pass, but the company did buy a big gas utility of few years ago to confuse the story.. The concept of buying up municipal water companies is still valid. This is the type of name you keep on a watch list and hope for some type of short-term disaster.
In a perfect world I would write another 70 short paragraphs on all the other utility stocks I glanced at, but that would be a giant waste of time. Right now EVRG is the king of the hill for utility stocks, but the contenders are not far away. There is still some work to be done. I will write a longer piece on EVRG if it looks like it might be a stock for the model portfolio.