Utility stocks have underperformed over the past few years. Investors shunned the sector due to worries about higher interest rates, which often magnify the impact on debt-laden utility firms. In addition, investors have placed less value on lower-risk dividend companies as the yields on risk-free government bonds increased.
But now, the narrative is changing. The demand for electricity to power data centers for artificial intelligence will grow considerably. In addition, the electric vehicle revolution is adding another significant source of long-term electricity demand.
These factors could end the country’s roughly flat electricity demand pattern and return the sector to significant secular growth. Utility stocks have started to perk up over the past few months. However, there are still bargains to be found with these three undervalued utility stocks to buy now.
Xcel Energy (XEL)
Xcel Energy (NASDAQ:XEL) is a large utility company serving about six million customers across eight states. It operates both in the electricity and natural gas markets.
Xcel operates in various states, including Colorado and New Mexico, with accelerated timelines for deploying renewable energy solutions. To that end, Xcel is deploying $34 billion between now and 2028 to expand and modernize its clean power generation fleet.
While the utility sector as a whole has rallied over the past 12 months, XEL stock has lagged.
Indeed, Xcel shares are down 15% year-to-date, bringing the stock down to less than 15 times forward earnings. Despite the firm’s massive capital investment program, Xcel offers investors a solid 4.2% dividend yield, which it has hiked for 21 years in a row.
Duke Energy (DUK)
Duke Energy (NYSE:DUK) is one of the largest players in the nuclear power space. Nuclear is white hot again, and people are looking for low-carbon alternatives for more baseload generation. Duke’s low-cost, reliable, always-on nuclear power fleet makes it a leader in the emerging electricity marketplace.
It also operates in several fast-growing and less heavily regulated southern states. This should allow Duke to enjoy above-average growth, especially as the data center and AI boom boosts demand in Duke’s core markets. For example, in May, Duke announced a clean energy supply deal with three leading big tech companies that should help fuel its longer-term growth prospects.
Duke shares have rallied a bit over the past year. But it’s still early in the move, as Duke stock had been flat over the past decade prior to the recent jump. Shares still go for less than 17 times forward earnings and offer a greater than 4% dividend yield.
Essential Utilities (WTRG)
Essential Utilities (NYSE:WTRG) is one of the larger publicly traded water companies. Until 2020, it was known as Aqua America. But it changed its name following the $4.3 billion purchase of People’s Gas.
That added some natural gas exposure to its portfolio, but it predominately remains a water company. Water is an attractive market as it has incredibly stable demand and doesn’t have the same carbon emission issues that have caused large capital expenditures at various electricity companies in recent years.
Essential can also benefit from another opportunity: Upgrading older water systems. Many of the country’s pipe networks and treatment facilities are outdated, leading to Flint, Michigan and Jackson, Mississippi crises. Utilities that can help local municipalities modernize their systems stand to benefit.
Essential Utilities has increased dividend payments for over 25 consecutive years, making it a Dividend Aristocrat. Shares currently yield 3.3%.
On the date of publication, Ian Bezek held a long position in WTRG stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
