What are we looking for?
Utilities with robust economic performance
The National Oceanic and Atmospheric Administration (NOAA) predicts above-average temperatures across the United States this summer. Historically, such high temperatures boost energy demand for cooling, significantly affecting overall electricity consumption in the U.S.
In deregulated markets, where prices are driven by supply and demand instead of regulatory controls, this increased demand could result in higher electricity prices.
As a result, we believe utility companies could benefit from both heightened electricity consumption and potentially elevated prices if they operate in unregulated markets.
The screen
We screened U.S. stocks, in the utilities sector, using the following criteria:
- Market capitalization greater than US$1-billion.
- an economic performance index (EPI) greater than 1. The EPI is return on capital divided by the cost of capital – a measure of profitability adjusted for risk. An EPI greater than 1 implies positive economic value creation;
- StockPointer (SP) performance score greater than 60. The score mainly considers risk-adjusted return on capital, earnings-per-share growth, and free cash flow per share. The score varies between zero and 100. A score of 60 or more implies a better-than-average performing company;
- Dividend yield greater than 2 per cent;
- Price-to-earnings (P/E) ratio lower than 20;
For informational purposes, we have also included one-year NOPAT (net operating profit after tax) growth, price-to-book (P/B) ratio and one-year price return.
More about Inovestor
Inovestor is a Canadian fintech company with more than 20 years of experience that has partnered with Morningstar in an alliance, solidifying Inovestor’s position as the industry’s leading alternative analysis tool. To learn more visit our website.
What we found
Consolidated Edison Inc. (ED-N), which has the second-largest market value on our screen, primarily focuses on electric and gas services in New York and surrounding areas. It owns significant regulated utility assets. It stands out with the highest EPI at a robust 1.7 and a solid SP performance score of 64. The company boasts a one-year NOPAT growth of 33.4 per cent, the third highest of our screen. In terms of valuation, the P/E ratio is the third highest of our screen at 18.1, but the P/B ratio gives a contrasting signal, being the third-lowest at 1.5.
WEC Energy Group Inc. (WEC-N) generates and distributes electricity and natural gas for 4.7 million customers in the Midwest. It operates in regulated markets, but also owns non-regulated assets in multiples fields, such as natural gas storage facilities and renewable energy infrastructure. The company has the second-highest performance score and highest dividend yield of our, list standing at 66 and 4.1 per cent, respectively.
Entergy Corp. (ETR-N) primarily operates in the regulated market, providing electricity to approximately three million customers in the Deep South states. Additionally, it has a presence in the unregulated market through its Entergy Wholesale Commodities segment, which is involved in owning, operating, and decommissioning nuclear power plants. The company stands out with the third-highest EPI at 1.4, lowest P/E at 11.2, lowest P/B at 1.2 and the second-highest one-year NOPAT growth at 56.6 per cent. Over the past year, it has been the top performer on our list, achieving a price return of 14.6 per cent.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.
For more details about these stocks, subscribe to the Inovestor for Advisors platform for free.
Anthony Ménard, CFA, is vice-president of data management at Inovestor.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.