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.

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.

6. Duke Energy (NYSE:DUK)  

Number of Hedge Fund Holders: 37  

TTM Net Income: $4.19 Billion  

5-Year Net Income CAGR: 5.55%

Duke Energy (NYSE:DUK) is one of the largest utility companies in the U.S., supplying electricity to approximately 8.4 million customers across the Southeast and Midwest. The company also operates a natural gas distribution business and provides services to 1.6 million customers in North Carolina, South Carolina, Tennessee, Kentucky, and Ohio.

Duke Energy (NYSE:DUK) is rapidly expanding its renewable energy portfolio, aiming to deploy 30 GW of regulated renewable power generation by 2035. The company’s solar operations form the largest component of its renewable energy mix. Duke Energy currently has over 6,000 MW of renewable capacity through more than 260 power purchase agreements and directly owns 430 MW of renewable generation, including 13 solar plants with a total capacity of up to 153 MW. In addition, the company is making significant investments in battery energy storage systems.

Duke Energy’s (NYSE:DUK) stock is trading at 18.93 times this year’s earnings estimate. The company is expected to achieve 7.27% earnings growth this year. Industry analysts maintain a consensus Buy rating on the stock, with a target price of $121.61, suggesting a 7.23% upside potential from its current price. Duke Energy’s (NYSE:DUK) geographic diversity, favorable regulatory environment, and solid growth outlook make it an attractive investment opportunity.

5. Exelon (NASDAQ:EXC)  

Number of Hedge Fund Holders: 37  

TTM Net Income: $2.42 Billion  

5-Year Net Income CAGR: 1.30%

Exelon (NASDAQ:EXC) is a leading energy provider based in Chicago, operating a diverse portfolio that includes nuclear, solar, wind, and natural gas generation facilities. The company is also engaged in energy distribution and transmission through various subsidiaries, including Commonwealth Edison Company (PECO), Baltimore Gas and Electric Company (BGE), Potomac Electric Power Company (Pepco), and Atlantic City Electric Company (ACE).

In Q2, Exelon’s (NASDAQ:EXC) revenue grew by 11.2%, reaching $5.36 billion compared to the same period last year. The company also received positive regulatory news, with the Maryland Public Service Commission (MDPSC) approving a $45 million increase in Pepco’s electric distribution rates for the 12-month period ending March 31, 2025, with a return on equity of 9.5%.

Exelon’s (NASDAQ:EXC) Q2 earnings exceeded expectations, with a 17.5% earnings beat. Earnings per share rose to 47 cents, up from 41 cents in the prior year. On a GAAP basis, earnings increased to 45 cents per share, compared to 34 cents in the same quarter last year.

Exelon’s (NASDAQ:EXC) P/E ratio of 16.04 reflects an 8% discount compared to the sector median of 17.44. Exelon’s earnings are projected to grow by nearly 3% this year. Industry analysts maintain a bullish outlook on the stock, with a consensus Buy rating and a target price of $42.37, implying a potential 7.59% upside from current levels.

The company’s diversified holdings, strong cash flow, and consistent dividend growth make it a compelling buy in the utility sector. As of the second quarter, 37 hedge funds hold a combined $465.12 million stake in the company.

4. AES (NYSE:AES)  

Number of Hedge Fund Holders: 46  

TTM Net Income: $754 Million  

5-Year Net Income CAGR: 13.52%

AES (NYSE:AES) is a utility company focused on providing affordable and sustainable energy solutions. The company operates in 15 countries and owns renewable energy assets, such as solar and wind in addition to conventional energy sources. AES (NYSE:AES) is committed to achieving net zero carbon emissions by 2050 and has made significant progress in expanding its clean energy portfolio.

AES’s (NYSE:AES) business model is well-positioned to benefit from the increasing global demand for clean energy. The company is rapidly growing its renewable portfolio, with a target of reaching 30GW of capacity by 2027, a key factor in its contracts with major corporate clients such as Microsoft and Google. AES’s (NYSE:AES) diverse revenue streams, including electricity generation, utility services, and energy infrastructure, provide stability during cyclical market fluctuations. The company’s aggressive transition to renewables is expected to fuel long-term growth, with its growing project backlog showcasing its ability to execute its strategy.

Despite being a major utility player, AES (NYSE:AES) is trading at 9.06 times this year’s earnings estimate, representing a 48.02% discount to its sector median of 17.44. The company’s 3.55% dividend yield is attractive, and its investment-grade credit rating remains stable. Analysts predict AES’s (NYSE:AES) earnings will grow by 8.69% this year and are optimistic about its stock, with a consensus Buy rating and a target price of $22.59, indicating a potential 26.35% increase from its current level.

3. NRG Energy (NYSE:NRG)  

Number of Hedge Fund Holders: 56  

TTM Net Income: $2.00 Billion  

5-Year Net Income CAGR: 28.15%

NRG Energy (NYSE:NRG) is an integrated power company based in the U.S. that offers a wide range of energy solutions to customers. The company operates a diverse mix of generation facilities, including solar, wind, and natural gas.

NRG Energy’s (NYSE:NRG) Q2 earnings report was a significant positive catalyst for the company, with consolidated revenue growing 4.8% year-over-year to $6.58 billion. The strong performance was driven by growth in the East and West regions, which reported high single-digit growth in sales, and the Texas region, which continued to show robust performance with volume growth and subscriber count increases. The company’s adjusted EBITDA margin also expanded by 120 basis points to a record 14.2%, driven by lower realized retail supply costs and strong sales across Texas. The company’s Vivint Smart Home business, a smart home company is also a major EBITDA contributor and is expected to continue its growth trajectory, driven by increasing demand for smart home solutions and a growing subscriber base.

NRG Energy (NYSE:NRG) has shown significant signs of recovery, driven by strong demand in Texas and improvement in the East and West regions. Looking ahead, NRG Energy (NYSE:NRG) is well-positioned to benefit from electrification trends driven by increasing data center demand and on-shoring activities. The company has made progress on its strategic priorities, including submitting brownfield development projects to the Texas Energy Fund, which involves repurposing previously used industrial sites for new energy development.

NRG Energy (NYSE:NRG) is expected to increase its earnings by 100% this year. Additionally, the Electric Reliability Council of Texas (ERCOT), an independent organization that manages the flow of electric power across Texas, is anticipating substantial load growth in the coming years, projecting over 60 gigawatts of growth through 2030. This growth is expected to be driven by on-shoring, data centers, and other large-load customers which will provide a long-term demand growth opportunity for NRG Energy (NYSE:NRG).

2. Constellation Energy (NASDAQ:CEG)  

Number of Hedge Fund Holders: 71  

TTM Net Income: $2.39 Billion  

5-Year Net Income CAGR: 35.27%

Constellation Energy (NASDAQ:CEG) provides energy products, including natural gas and related services, across North America. The company owns the largest US fleet of nuclear power plants and generates 10% of the United States’ carbon-free electricity.

On September 20, Constellation Energy (NASDAQ:CEG) announced a 20-year power purchase agreement with Microsoft, where the tech giant will purchase a substantial amount of energy from the renewed plant to power its data centers. This milestone will made possible with the launch of the Crane Clean Energy Center (CCEC) and the planned restart of the Three Mile Island Unit 1 nuclear reactor, which was shut down in 2019 due to economic reasons. As a result of this agreement, approximately 835 megawatts of carbon-free energy will be added to the grid, significantly contributing to a cleaner and more sustainable energy mix. CCEC is expected to be operational by 2028.

Constellation Energy (NASDAQ:CEG) is poised for substantial growth, with projected earnings expected to rise by 45.84% this year. Over the past five years, the company has achieved a compound annual growth rate (CAGR) of 35.27% in net income. For the twelve months ending June 30, Constellation’s net income reached $2.39 billion, marking a 208.91% year-over-year increase, driven by investments in sustainable energy solutions and long-term contracts with major tech firms.

1. NextEra Energy (NYSE:NEE)  

Number of Hedge Fund Holders: 73  

TTM Net Income: $6.32 Billion  

5-Year Net Income CAGR: 13.60%

NextEra Energy (NYSE:NEE) is the world’s largest producer of wind and solar energy, with a focus on clean and renewable energy solutions. The company operates through its two main subsidiaries, Florida Power & Light (FPL) and NextEra Energy Resources.

The company’s renewable origination has improved, with a higher backlog compared to Q1 2024. The company’s backlog totals 22.6GW, up from 21.5GW last quarter. This suggests that NextEra Energy (NYSE:NEE) will be able to achieve its 40GW of renewable energy target for the 2024-2027 timeframe. NextEra Energy (NYSE:NEE) is well-positioned to benefit from rising electricity demand form to data centers (AI) and reshoring activities.

On September 18, the U.S. Nuclear Regulatory Commission (NRC) granted Florida Power & Light Company’s (FPL) Turkey Point Nuclear Power Plant Units 3 and 4 a subsequent license renewal, allowing the facility to operate for an additional 20 years. Located in South Florida, the Turkey Point facility is a major economic asset, generating enough energy to power nearly 1 million homes and businesses. The subsequent license renewal process was rigorous, with FPL completing a reapplication process that included providing additional documents for a site-specific environmental impact statement. The company’s efforts were recognized by the NRC, which granted the license renewal approval.

FPL’s commitment to clean energy solutions is evident in its fuel mix, with nuclear power comprising 20% of its energy sources. The company is also undergoing subsequent license renewal applications for its St. Lucie Nuclear Power Plant and the Point Beach Nuclear Power Plant, owned by its NextEra Energy Resources. In conclusion, NextEra Energy (NYSE:NEE) is a well-positioned utility company with a strong growth trajectory, driven by data centers and reshoring activities. Industry analysts expect the company to increase its earnings by 7.29% this year.

While we acknowledge the potential of NextEra Energy (NYSE:NEE) to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NEE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.

Disclosure. None. Insider Monkey focuses on uncovering the best investment ideas of hedge funds and investors. Please subscribe to our daily free newsletter to get the latest investment ideas from hedge funds’ investor letters by entering your email address below.