Technology stocks have dominated the discussion on Wall Street for years. Potential game-changing innovations such as artificial intelligence (AI), virtual and augmented reality, and blockchain technology have captured the attention (and wallets) of growth-oriented investors who don’t want to miss the next big trend.
But in this search for the next big growth stock, some astonishing deals in traditionally safe sectors and industries have slipped through the cracks. Within the utilities sector, two fantastic companies that are cheaper than they have been in at least a decade serve as perfect examples.
NextEra Energy
Firstly, there is the largest share of electricity companies, measured by market capitalization, NextEra Energy (NYSE: NO).
After more than two decades of nearly uninterrupted positive annual returns, including dividends paid, NextEra stock was taken to the proverbial woodshed in 2023. Excluding dividends paid, NextEra stock lost 27% of its value, which is an even worse performance over a year. than during the height of the financial crisis in 2008, when the stock lost 26%
There are two easily identified negative catalysts for NextEra Energy. The rapidly rising interest rates on short-term government bonds were the first problem. Instead of risking their key holdings by buying utility stocks, they can protect their initial investment with ultra-safe U.S. Treasury bonds that yield a solid 5% interest rate.
The other concern for NextEra was the announcement of NextEra Energy Partners (NYSE: NEP) in September that it would cut its annual dividend growth target to 6% through 2026, down from a previous forecast of 12%. This left Wall Street concerned that NextEra Energy Partners would be involved in fewer renewable energy drop-down transactions with parent company NextEra Energy.
While these are tangible concerns for NextEra Energy, the company’s bottom line suggests it’s still firing on all cylinders and keeping its foot on the accelerator.
NextEra’s defining feature is its focus on renewable energy. When the curtain fell in 2023, the company had a capacity of 72 gigawatts (GW) in operation. Half of this power (36 GW) comes from clean energy sources. In fact, the 24 GW that NextEra generates from wind energy, and the 7 GW of capacity it generates from solar energy, are both top levels in the world for an electric utility.
There are two benefits to a focus on renewable energy. Obviously, it significantly reduces electricity generation costs for NextEra. Investing in a green future has helped NextEra achieve 10% annualized profit growth since 2013.
Additionally, it gives NextEra Energy an edge if and when the U.S. government requires utilities to transition to cleaner energy sources.
NextEra Energy has no plans to slow or halt its investments in renewable energy, even as interest rates have soared over the past two years. The company remains committed to its expectation that 32.7 to 41.8 GW of collective wind, solar, energy storage and wind energy projects will come online between early 2023 and the end of 2026.
Despite NextEra’s outsized growth, shares of the company can now be purchased for a multiple of just 17 times next year’s earnings. This is the lowest earnings multiple in the past ten years, based on the state of affairs over the past ten years. With annual dividend growth of around 10% and a current yield of 3.2%, NextEra Energy may never be this cheap again.
York water
At the other end of the spectrum: the stock of water companies York water (NASDAQ: YORW)with a market cap of just $484 million, next to NextEra’s valuation of $131 billion, has all the earmarks of a screaming buy.
Shares of his small water and wastewater services company in south-central Pennsylvania have fallen 25% since the opening bell in 2023. The culprit for this poor performance, like NextEra above, is rapidly rising government bond yields and higher interest rates. .
York’s management team has historically leaned on add-on acquisitions to expand its customer base. Debt-based financing can also be used for infrastructure upgrades. At the end of 2023, York Water had $180 million in long-term debt, which could become more expensive in a continued higher interest rate environment.
While interest rates have been working against York Water over the past two years, there are a number of reasons why now is the perfect time to grab shares of this under-the-radar water utility stock.
For starters, York is a regulated utility. Simply put, this means York is unable to raise rates for its customers without the express approval of a state public utility commission — in this case, the Pennsylvania Public Utility Commission, or PPUC. While I understand this sounds like an operational limitation, it’s actually good news. Being regulated means York is not exposed to potentially unpredictable wholesale prices. It also means that the company’s operating cash flow is highly predictable, which is useful when investing capital for new projects and add-on acquisitions.
In January 2023, York Water received the green light from the PPUC to increase rates for approximately 75,000 of its customers to recoup $176 million in infrastructure investments. As a result of this interest rate increase, York’s operating revenues increased by 18% last year to more than $71 million.
I would be remiss if I didn’t also mention that utilities often operate as monopolies or duopolies in the areas they serve. Because York’s water and wastewater customers do not have the opportunity to shop around, and virtually every homeowner and renter needs water and wastewater service, York’s operating cash flow is transparent and predictable from year to year.
But what makes this small water company so outstanding is its dividend history. I’ve called York Water ‘Wall Street’s Greatest Dividend Stock’ because it has paid dividends continuously since its founding in 1816. That’s 208 consecutive years of payouts, which is about 60 years longer than the nearest publicly traded company.
Since the turn of this century, York Water shares have effectively doubled the benchmark nominal return S&P500 (496% to 242%), and absolutely blew it including the dividends paid out (1,030% vs. 443%).
Shares of York Water can now be snapped up by opportunistic investors for exactly twenty times next year’s earnings. That’s the lowest full-year profit figure in a decade, and a 37% discount on the average profit figure over the past five years.
Should You Invest $1,000 in NextEra Energy Now?
Consider the following before purchasing shares in NextEra Energy:
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Sean Williams has positions in NextEra Energy. The Motley Fool holds and recommends NextEra Energy. The Motley Fool has a disclosure policy.
Time to Pounce: 2 Great Utility Stocks That Haven’t Been This Cheap in At Least a Decade originally published by The Motley Fool
