Utilities to Experience Significant Growth
According to Research and Markets, the global utility market was valued at $6.89 trillion in 2024 and is projected to reach $8.83 trillion by 2028, growing at a CAGR of 6.4%. The market’s expansion is expected to be driven by several factors, including population growth, economic development, investments in renewable energy, and a rise in utility mergers and acquisitions. Key trends in the sector include a focus on Power Purchase Agreements (PPAs), increased funding for solar energy battery storage, and investments in technologies such as smart grids and smart meters.
A Stable and Secure Investment
Keith Meister, Chief Investment Officer at Corvex Management, in an interview on CNBC, shared his perspective on the utility sector. Meister pointed out that utilities are well-regulated businesses that have historically experienced flat electricity load growth in the U.S. from 2013 to 2023. However, new technologies and regulatory changes, such as the Inflation Reduction Act (I.R.A.) and advances in Artificial Intelligence (A.I.), have boosted the sector’s projected growth rate to 3%. This growth is driven by increasing electricity demand, particularly as renewable energy sources become more widely adopted and the need for power to support technological advancements rises.
Meister believes the U.S. has created strong capital markets and incentives for investment in the utility sector, making it a favorable investment in the current cycle. He noted that a few years ago, utilities were trading at 20 times the market, but now they are more reasonably priced at two times the market. This drop in valuation makes utilities an appealing investment opportunity, especially considering their guaranteed income and solid dividends.
Meister highlighted the sector’s appealing characteristics, such as guaranteed income and good dividends, which make utilities a strong investment option. Investors don’t need to rely on multiple expansions to achieve 10% growth from these stocks, and any additional earnings growth would be a bonus. In a market where growth and returns are increasingly uncertain, utilities offer a relatively stable and secure investment opportunity.
The global utilities market is poised for significant growth, driven by a combination of factors including population growth, economic development, and increasing investments in renewable energy. The global utilities market is an attractive opportunity for investors looking for a stable income and return on investment. With that in context, let’s take a look at the 8 most profitable utility stocks to invest in.
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Our Methodology
To compile our list of the 8 most profitable utility stocks to invest in, we used the Finviz and Yahoo stock screeners to compile an initial list of the 20 largest utility companies by market cap. From that list, we narrowed our choices to companies with positive TTM net income and 5-year net income growth informed by reputable sources, including SeekingAlpha, which provided insights into 5-year growth rates, and Macrotrends, which supplied information on trailing twelve-month (TTM) net income. Then we sorted the stocks in ascending order, according to their hedge fund sentiment, which was taken from our database of 912 elite hedge funds as of Q2 of 2024.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
8 Most Profitable Utility Stocks To Invest In
8. CMS Energy (NYSE:CMS)
Number of Hedge Fund Holders: 35
TTM Net Income: $960 Million
5-Year Net Income CAGR: 10.72%
CMS Energy (NYSE:CMS) is a Michigan-based utility company that provides natural gas and electricity through its principal subsidiary, Consumers Energy. CMS Energy (NYSE:CMS) is Michigan’s largest utility company, serving 68% of state residents offering both electric and gas services. CMS Energy (NYSE:CMS) generates 54% of its power from gas, 21% from coal, 13% from renewables, and 13% from purchased power.
CMS Energy (NYSE:CMS) is a strong and stable company with a proven track record of delivering industry-leading financial performance. For over 21 years, the company has consistently executed its investment thesis, which focuses on making necessary and important investments in its system while maintaining customer affordability. This approach has allowed the company to deliver 6% to 8% adjusted earnings growth, making it an attractive investment opportunity for investors.
One of the key drivers of CMS Energy’s (NYSE:CMS) success is its strong regulatory environment. Michigan’s regulatory framework provides a supportive environment for the company to make investments in its electric and gas systems, making them safer, more reliable, and resilient. The company’s 10-month forward-looking rate cases, financial and fuel recovery mechanisms, and increased energy waste reduction incentives are just a few examples of the attributes that make Michigan’s regulatory environment one of the best in the country. This strong regulatory environment provides CMS Energy (NYSE:CMS) with a solid foundation for long-term growth and profitability.
CMS Energy’s (NYSE:CMS) financial performance has been strong in the first half of 2024, with adjusted earnings per share of $1.63, up $0.18 versus the first half of 2023. The company’s rate relief, net of investment costs, has been a key driver of this performance, with constructive outcomes achieved in its electric rate order and gas rate case settlement. Additionally, the company’s solid operational performance at NorthStar and higher weather-normalized electric sales have contributed to its positive results. With a strong regulatory environment, a commitment to customer affordability, and a solid financial performance, CMS Energy (NYSE:CMS) is well-positioned for long-term growth and profitability.
Looking ahead, CMS Energy’s (NYSE:CMS) guidance for 2024 remains strong, with adjusted earnings per share expected to be in the range of $3.29 to $3.35. Analysts forecast the company to grow its earnings by 6.83% this year. The company’s financing plan is also on track, with a modest increase in planned debt issuances at the utility to rebalance the rate-making capital structure. With no planned long-term financings in 2024, CMS Energy (NYSE:CMS) is well-positioned to deliver on its financial objectives and continue its track record of industry-leading performance.
7. Evergy (NASDAQ:EVRG)
Number of Hedge Fund Holders: 36
TTM Net Income: $739 Million
5-Year Net Income CAGR: 3.83%
Evergy (NASDAQ:EVRG), a utility company formed in 2018 through the merger of Great Plains Energy and Westar Energy, serves a large customer base of 1.7 million in Kansas and Missouri. Evergy (NASDAQ:EVRG) has made significant investments in wind power, aiming to reduce its carbon footprint and expand its renewable energy capacity.
In the second quarter, Evergy (NASDAQ:EVRG) reported a 6.9% year-over-year increase in revenue, reaching $1.4 billion, while adjusted earnings per share (EPS) jumped 11.1% to $0.90. The growth was driven by factors such as higher retail rates in Kansas, increased demand, and improved transmission margins. Notably, the company’s non-GAAP profit margin expanded by nearly 80 basis points to 14.5%, outpacing revenue growth. Management reaffirmed its guidance for 4-6% annual adjusted EPS growth through 2026, citing economic development projects, including the Panasonic EV manufacturing plant, which is expected to reach full capacity by 2026.
Evergy’s (NASDAQ:EVRG) financial health is strong, with a debt-to-capital ratio of 50.3% and an attractive dividend yield of 4.3%. Evergy’s (NASDAQ:EVRG) is significantly undervalued, as of October 11 the company’s stock is currently trading at a price-to-earnings ratio of 15.39, representing a 11.75% discount to the sector median of 17.44.
Analysts expect Evergy (NASDAQ:EVRG) to achieve 8.13% earnings growth this year. The consensus among industry analysts is bullish, with a Buy rating and a target price of $63.39, implying a potential 7.07% increase from current levels.
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