Last year was unfriendly to the utility sector. It had a negative return and was the worst-performing group. Investors chose safer US Treasuries instead of higher-yielding stocks. But in 2024, the sector looks attractive, and Eversource Energy (ES) is my top pick for income-oriented investors, outlines Prakash Kolli, editor of Dividend Power.
The company has grown into the largest regulated utility in New England through M&A, investment, and expansion in renewable energies. The firm acquired NStar's Massachusetts utilities in 2012, Aquarion in 2017, and Columbia Gas in 2020, expanding its footprint.
Also, the utility is upgrading its transmission and distribution capabilities, increasing efficiency, improving customer service, reducing emissions, and lowering costs. Lastly, Eversource is spending billions to generate 1,758 megawatts of offshore wind power in a joint venture.
As a result, earnings per share have grown at 6% on average in the past decade. It should continue with the upward trend because the firm estimates 50% rate base growth, which should translate to higher earnings. Further, Eversource is diversified across electricity, natural gas, and water, giving it potential acquisition targets in its home territory for future expansion.
That said, the firm faces regulatory risk. Unfriendly state regulators or changes can impact rates of return and profitability. They could also limit future expansion opportunities.
In addition, Eversource has used debt to pursue acquisitions. Net debt has climbed from $14,534 million in 2017 to $26,021 million in the last twelve months. One consequence is higher interest expense, especially because rates have surged.
Still, the credit rating agencies grade Eversource an A-/Baa1, a lower to upper-medium rating. And despite the risks, Eversource presents income-oriented investors with a favorable risk-to-reward profile. The firm has scale and a monopoly in its operating area with consistent demand.
The utility also had a 4.3% dividend yield recently, one supported by a reasonable payout ratio of approximately 62%. In addition, the stock achieved Dividend Champion status with 25 years of increases. The growth rate is around 6% annually. The last increase was in January 2023, and investors should expect another one in early 2024.
Like most utilities, Eversource's share price has declined because of climbing interest rates. Consequently, the forward P/E ratio was recently 14.5X, well below the range of the past five and ten years. Eversource is a long-term buy.
