eversource energy

Eversource Energy (ES): An Undervalued Utility

If you are pursuing a distinguished dividend growth investment opportunity, our focus turns to an undervalued stock of particular interest – Eversource Energy. Eversource Energy, identified by the ticker symbol ES, has found a place in my dividend growth portfolio, and my recent acquisitions reflect my confidence in its potential. As of the time of writing, the stock is trading at $62.08 per share, prompting a closer examination of its valuation and suitability for investment. This analysis will assess whether Eversource Energy merits consideration as a sound destination for our hard-earned capital.

Upon scrutiny using Fastgraph, the company’s financial outlook appears promising, with anticipated annual returns exceeding 24.6% for the next three years at the current share price.

Eversource Fastgraphs
Source: Fastgraphs

Here, we have a technical chart of Eversource. We can see that it’s near a long-term trendline and down a few red bars on the monthly time frame. As well, it is very close to COVID-19 pandemic lows.

Eversource Stock Chart
Source: TradingView

Overview of Eversource

Eversource Energy (NYSE: ES) is a prominent Fortune 500 energy company with a primary focus on providing essential utility services in the New England region of the United States. Serving customers in Connecticut, Massachusetts, and New Hampshire, the company is deeply involved in distributing electricity, natural gas, and water to a wide range of residential, commercial, and industrial clients. 

Eversource is a significant player in the electricity sector, operating a vast power infrastructure network to ensure a dependable electricity supply. Additionally, they offer natural gas distribution services for heating, cooking, and industrial processes in select areas. As part of its commitment to sustainability, Eversource has been actively investing in renewable energy projects, energy efficiency initiatives, and grid modernization efforts to reduce its environmental impact and promote cleaner energy sources.

Eversource Energy’s stock has experienced a significant decline of 39.3% from its peak in February 2020. Notably, this decline cannot be attributed to any internal issues within the company, as its earnings have remained consistent. Instead, the primary driver behind this decrease is the broader overvaluation of stocks, particularly within the utility sector, which has seen a downturn in performance. In addition high interest rates tend to depress utility stock prices.

Currently, the stock is trading at $62.08 per share, aligning closely with the lower end of its 52-week price range, which spans from $60.37 to $92.80 per share. This positioning suggests that ES may present an attractive opportunity for investors seeking to acquire shares at a favorable price point.

Eversource Overview
Source: Eversource Energy Investor Relations

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ES Dividend History, Growth, and Yield

We will look at ES’s dividend history, growth, and yield. We will then determine if it’s still a good buy at current prices.

ES is considered a Dividend Champion, a company that has increased its dividend for over 25 years.

In this case, ES stock has increased its dividend for 25 consecutive years. ES’s most recent dividend increase was 5.9%, announced in February 2023. Investors should expect another increase in February 2024.

Dividend Growth

Additionally, according to Portfolio Insight*, ES has a five-year dividend growth rate of about 6.1%, which is reasonable considering how fast inflation increased last year and this year. The 10-year dividend growth rate is a little higher at ~6.8%.

Portfolio Insight - Dividend Growth ES
Source: Portfolio Insight*

Something note is that Eversource stock continued to pay its dividend during the most challenging period in the last 100 years. Many businesses and industries cut or suspended dividend payments during the COVID-19 pandemic. However, unlike many other stocks, Eversource continued to pay its dividends and increase them. That is very noteworthy. This fact alone leads me to believe in the strength of the company and the fact that management is focused and committed to the dividend policy.


Dividend Yield

Eversource Energy offers an appealing dividend yield of approximately 4.2%, surpassing the dividend yield of the S&P 500 Index. This robust dividend yield serves as an attractive starting point for investors who prioritize dividend growth in their portfolios. Additionally, it presents a solid choice for income-focused investors seeking a yield of 4.0% or higher from their investments.

Portfolio Insight - Dividend Yield History ES
Source: Portfolio Insight*

The current dividend yield for Eversource surpasses its 5-year average dividend yield, which stands at approximately 2.8%. This metric provides valuable insight into the company’s valuation. The relationship between stock price and dividend yield is inherently inverse, meaning that when stock prices rise, dividend yields tend to decrease, and vice versa. Investors can gauge whether the stock is undervalued or overvalued by comparing the current dividend yield to the 5-year average. In this context, the higher current yield relative to the 5-year average suggests that Eversource Energy may currently be trading at a relatively attractive valuation.

Dividend Safety

Ensuring the safety of the current dividend is of paramount importance for dividend growth investors, as undervalued dividend stocks can sometimes become “value traps,” with stock prices continuing to decline. Two crucial metrics must be examined to assess the sustainability of annual dividend payments: Adjusted operating earnings (EPS) and free cash flow (FCF) or operating cash flow (OCF) per share. 

Analysts’ projections indicate that Eversource is expected to earn approximately $4.37 per share for fiscal year 2023, and historical accuracy in forecasting ES’s future EPS is noted at 100%. Furthermore, the company is expected to distribute $2.70 per dividend share over the entire year. This results in a calculated payout ratio of roughly 61.8% based on EPS, which is a conservative value, indicating ample room for continued dividend growth. 

As a prudent approach, a payout ratio under 65% is preferred. Eversource’s dividend yield ratio of approximately 4.2%, combined with expectations for future growth, supports this goal and allows the company to sustain dividend growth at a mid-single-digit rate without compromising dividend safety. Additionally, Eversource maintains a dividend payout ratio of 30.8% based on OCF, further affirming the dividend’s security in terms of EPS and OCF. 

Eversource’s Revenue and Earnings Growth / Balance Sheet Strength

We will now look at how well Eversource performed and grew its EPS and revenue throughout the years. When valuing a company, these two metrics are at the top of my list to study. Without revenue growth, a company can’t have sustainable EPS growth and continue paying a growing dividend.

Eversource’s revenue has been growing reasonably at a compound annual growth rate (CAGR) of about 7% for the past ten years, according to Portfolio Insight*, about the same pace as the increase in rate base. Net income did much better with a CAGR of ~6.7% over the same ten-year period. However, EPS has grown 6.0% annually for the past ten years and at a CAGR of 5.7% over the past five years.

Portfolio Insight - Earnings_Share ES
Source: Portfolio Insight*

Considering the company’s impressive track record of revenue, net income, and EPS growth over the years, our evaluation will primarily focus on its valuation and dividend yield. Analysts project that Eversource Energy (ES) will sustain a 5.1% annual growth rate in EPS over the next five years.

Notably, despite the challenges posed by the COVID-19 pandemic over the past two years, Eversource achieved a 6% increase in EPS, rising from $3.86 per share in FY2021 to $4.09 per share in FY2022. Furthermore, analysts anticipate ES will attain an EPS of $4.37 per share for fiscal year 2023, reflecting approximately a 7% rise compared to FY2022. This consistent pattern of earnings growth is a positive indicator for investors, indicating the company’s resilience and ability to continue improving its financial performance. Additionally, the forecasted earnings for the subsequent years suggest a 6% increase in 2024 and another 6% growth in 2025, further bolstering confidence in ES’s future earnings potential.

Balance Sheet

Furthermore, ES maintains a robust balance sheet with a favorable debt-to-equity ratio of 1.6. The credit rating agencies give Eversource an A-/Baa1, lower to upper-medium grade score. This solid financial position enhances the company’s capacity to navigate significant economic challenges, as evidenced by its stability during the COVID-19 pandemic’s two-year impact. This aspect also contributes to the security of the company’s dividend payments. Lastly, Portfolio Insight gives Eversource a dividend quality grade of an ‘A+,’ its highest score.

Eversource Stock’s Competitive Advantage

Investing in Eversource Energy (NYSE: ES) has advantages and disadvantages. On the positive side, the company operates in a stable utility sector, providing consistent demand for essential services like electricity and gas. It makes it appealing to income-focused investors due to its history of dividend payments. However, regulatory risks and limited growth potential are potential downsides. Regulation changes can impact pricing and profitability, and regulatory approvals constrain expansion opportunities. Additionally, interest rate sensitivity is a consideration due to the company’s reliance on debt financing.

Eversource has competitive strengths, including a robust infrastructure that acts as a barrier to entry for competitors, a strong brand known for reliability, and a commitment to sustainability, positioning it well in a changing energy landscape. Investors should carefully assess these factors based on their financial goals and risk tolerance. Please note that the information provided is based on my last knowledge update in September 2021, and market conditions may have evolved since then.

Valuation for Eversource Energy

One of the valuation metrics that I like to look for is the dividend yield compared to the past few years’ histories. I also want to look for a lower price-to-earnings (P/E) ratio based on the past 5-year or 10-year average. Lastly, I like to use the Dividend Discount Model (DDM). I use a DDM analysis because a business ultimately equals the sum of the future cash flow that the company can provide. 

Let’s first look at the P/E ratio. ES has a P/E ratio of ~14.5X based on FY 2023 EPS of $4.37 per share. The P/E multiple is excellent compared to the past 5-year P/E average of 19.5X. If Eversource were to revert back to a P/E of 19.5X, we would obtain a price of $85.22 per share.

Now, let’s look at the dividend yield. As I mentioned, the dividend yield currently is 4.2%. There is good upside potential as Eversource’s 5-year dividend yield average is ~2.8%. For example, if ES were to return to its dividend yield 5-year average, the price target would be $96.43.

The last item I like to look at to determine a fair price is the DDM analysis. I factored in a 9% discount rate and a long-term dividend growth rate of 5%. I use a 9% discount rate because of the higher current dividend yield. In addition, the projected dividend growth rate is conservative and lower than its past 5-year average. These assumptions give a fair price target of approximately $70.88 per share.

If we average the three fair price targets of $85.22, $96.43, and $70.88, we obtain a reasonable, fair price of $84.17 per share, giving Eversource a possible upside of 35.6% from the current price of $62.08.

Final Thoughts on Eversource Energy

Eversource Energy (ES) is a high-quality company that aligns well with the needs of most investors. The company offers an attractive 4.2% yield, outperforming the broader market, and boasts a commendable track record of long-term dividend growth. Historical earnings growth has been impressive, although it’s important to note that past performance does not guarantee future results. Nevertheless, considering the current stock price, Eversource appears to be an appealing investment opportunity, presenting a potentially attractive proposition for investors seeking both income and growth in their portfolio.

Disclosure: I do own shares of ES

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My name is Felix Martinez, and I am a Dividend Growth Investor who has invested in dividend growth stocks for the past seven years. I also run a YouTube channel called FiscalVoyage. I have written for SeekingAlpha.com as well as SureDividend.com. I focus on undervalued dividend growth stocks with capital return and dividend income potential. Make sure to follow me on my YouTube Channel. See you there.

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