undervalued utility stocks

3 Undervalued Utility Stocks

Investors typically purchase utility dividend stocks for their safety and payouts. Indeed, utility stocks are generally called “widow and orphan” stocks due to their consistency and reliable dividend payouts annually.

With the ongoing war in Ukraine, above-normal inflation, and the potential for a recession, investors looking to reduce volatility in their portfolios could consider utility stocks. These 3 utility stocks have dividend yields above the S&P 500 Index average and are undervalued, which could lead to double-digit annualized returns over the next several years.


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3 Undervalued Utility Stocks

UGI Corp (UGI)

UGI Corporation is an electric and gas utility doing business in Pennsylvania, in addition to a large energy distribution business serving the entire United States and other parts of the world. The utility was founded in 1882 and has paid consecutive dividends since 1885, making it one of the few stocks paying dividends for 100+ years.

The utility operates in four reporting segments: AmeriGas, UGI International, Midstream & Marketing, and UGI Utilities. In the 2023 second quarter, UGI reported GAAP diluted earnings per share (EPS) of $0.51 and adjusted diluted EPS of $1.68, which were lower compared to the same period in the prior year, where GAAP diluted EPS was $4.32 and adjusted diluted EPS was $1.91. 

For the year-to-date period, the company’s GAAP diluted EPS was ($4.02), while the adjusted diluted EPS was $2.82. These figures show a decrease compared to the prior-year period, where GAAP diluted EPS was $3.87 and adjusted diluted EPS was $2.84.

Dividend and Valuation

Still, UGI remains solidly profitable using adjusted numbers, allowing it to pay shareholders dividends. UGI shares currently yield 5.5%. The 2023 dividend payout ratio is expected to be 53% based on adjusted EPS, indicating a safe dividend. UGI has increased its dividend for 36 consecutive years, making it a Dividend Champion.

UGI stock trades for a 2023 price-to-earnings ratio of 9.4X, significantly below our fair value estimate of 14X. An increase in the P/E ratio to 14X could boost annual returns by over 7% per year in the next five years. Total expected returns are estimated at 17.6% per year through 2028, making it one of the most undervalued utility stocks.

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

Eversource Energy (ES)

Eversource Energy is a diversified utility holding company with subsidiaries that provide regulated electric, gas, and water distribution service in the Northeast United States. The company’s utility subsidiaries serve more than 4 million customers after acquiring NStar’s Massachusetts utilities in 2012, Aquarion in 2017, and Columbia Gas in 2020. 

For the 2023 first quarter, the company reported revenue of $3.8 billion, an increase of 9.4% compared to $ 3.5 billion in the same quarter of last year. The company reported earnings of $491.2 million and earnings-per-share of $1.41 compared with earnings of $443.4 million and earnings-per-share of $1.28 in the prior year. The Electric Transmission segment earned $155.1 million, up 4.5% from the prior-year quarter. 

The improvement primarily resulted from a higher level of investment in Eversource’s electric transmission system. Earnings from the Electric Distribution segment were $165.5 million, up 17.5% from the prior-year quarter.

Its investments will fuel the company’s future growth. Eversource Energy aims to invest $21.5 billion in different projects (transmission, electric distribution) in the 2023 to 2027 timeframe, which will support its goal to be carbon neutral by 2030. Most notably, the company plans to add 1,758 megawatts of offshore wind through a joint venture by 2025.

Related Articles About Eversource (ES) Energy

Dividend and Valuation

The company reaffirmed its earnings per share growth ambition at a 5% to 7% compound annual rate from 2023 through 2027, the same as for dividend growth. The company’s dividend payout ratio has averaged around 64% during the past five years. The company has a projected 2023 payout ratio of 62%, indicating a sustainable dividend. Given the expected earnings growth, there is still room for the dividend to grow. The stock has a current yield of 3.7%.

The company projects 2023 earnings of between $4.25 per share and $4.43 per share. Using the midpoint of this guidance range, shares trade for a 2023 P/E of 16.7X, significantly below our fair value of 21X. Total returns are expected to reach 14.6% per year over the next five years.

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

Vistra Corp. (VST)

Vistra is an integrated retail electricity and power generation company and is our third undervalued utility stock. It is one of the largest power generators in the United States. It has a capacity of roughly 37,000 megawatts generated by a diverse portfolio which includes natural gas, nuclear, solar, and battery energy storage facilities. 

Its products and services are offered across 20 states and the District of Columbia, including wholesale markets in Canada and Japan. Vistra serves approximately 4 million residential, commercial, and industrial retail customers with electricity, natural gas, and renewable energy plants. 

The utility reported first-quarter 2023 results on May 9th, 2023. Vistra reported adjusted EBITDA from ongoing operations for the first quarter to be $554 million, which compares favorably to $541 million in the prior year’s quarter. Leadership reaffirmed its fiscal 2023 guidance. The guidance calls for an adjusted EBITDA of $3.70 billion at the midpoint. Adjusted free cash flow before growth capex is expected to reach $2.05 billion at the midpoint. 

Vistra primarily utilizes adjusted EBITDA to measure company performance, so we have converted this to display as adjusted EBITDA per share. Based on our adjusted EBITDA per share calculations, EBITDA has grown by 12.8% and 9.3% on average over the past 5 and 3 years.

We expect the company to grow EBITDA-per-share by 3% per year moving forward. In addition to organic growth, its share repurchases will boost EPS growth. As of May 4th, 2023, Vistra completed about $2.7 billion of its upsized $4.25 billion share repurchase program. Since the program was announced in November 2021, Vistra has reduced its share count by about 23%.

Dividend and Valuation

On May 3rd, 2023, Vistra declared a $0.204 quarterly dividend, representing a 15% year-over-year increase. The company has increased its dividend for five consecutive years, making it a Dividend Challenger. The forecast dividend payout ratio is under 30% for 2023. The stock has a 3.1% current dividend yield.

In addition, the stock is undervalued with a 2023 P/EBITDA of 2.7X against our fair value estimate of 4X. Total returns are expected to reach 13.5% per year over the next five years.

Portfolio Insight - Dividend Growth VST
Source: Portfolio Insight*

Disclosure: Members of the Sure Dividend team are long UGI, ES, and VST.

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Bob Ciura
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Bob Ciura is President of Content at Sure Dividend. Bob has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. Bob received a bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.

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