PPL Corporation (PPL), NextEra Energy, Inc. (NEE), Xcel Energy Inc (XEL): Three Utility Stocks to Buy

Attractive valuations and growth = Opportunity

Through its subsidiaries, Xcel Energy Inc (NYSE:XEL) is engaged in the generation, purchase, distribution, and sale of electricity in the U.S. Xcel Energy Inc (NYSE:XEL) has a potential to post above-industry average growth and returns in the future, as it has been aggressively undertaking capex, which will allow it to enjoy rate base growth. This will result in future sales and earnings growth.

There are several pending rate cases requests filed by the company, amounting to more than $350 million, which are likely to fuel its future earnings-per-share growth. Pending rate cases are expected to conclude by year-end and new rates are likely to be effective from the first quarter of 2014. Earnings for the company are expected to grow by 5% per annum in the upcoming five years.

Given the company’s attractive growth prospects, its forward P/E of 13.8x appears to be cheap in comparison to the utility sector’s forward P/E of 15.25x. A positive outcome of pending rate cases will result in multiple expansions for Xcel Energy Inc (NYSE:XEL), which will likely result in stock price appreciation. This makes Xcel Energy Inc (NYSE:XEL) a good investment opportunity.

Other than attractive valuations and potential growth prospects, Xcel Energy Inc (NYSE:XEL) pays a decent dividend yield of 4.1%, accompanied with a low payout ratio of 55% and a solid operating cash flow yield of 16%. As the company shows growth prospects, dividends are likely to grow along earnings in the upcoming years. Also, the company can increase dividends by pushing its payout ratio up, as it currently has a moderate payout ratio of 55%.

Conclusion The utility sector provides investors a continuous and less risky income stream, as it offers a high yield on average. The 10-year Treasury yield is currently below 3%, which makes utilities an attractive investment option for income-seeking investors. However, Treasury yields are anticipated to rise from next year onwards, creating a headwind for utilities. Despite the projected rise in yields, the three above-mentioned companies are expected to outperform their peers due to their high growth prospects and/or cheaper valuations.

The article 3 Utility Stocks to Buy originally appeared on Fool.com and is written by Syed Shah.

Syed Shah has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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