5 utility actions to play electric vehicles and climate change

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Utilities stocks have a sunny outlook and will benefit from climate change.

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At times, utility stocks can seem downright sleepy. But things are looking up for utility stocks as more electric vehicles are sold, temperatures rise and people are frustrated by unexpected power outages.

Five of the utility stocks Jay Rhame, CEO of Reaves Asset Management, likes the most are: NextEra Energy (ticker: NEE), Public Service Enterprise (PEG), Edison International (EIX), Exelon (EXC) and Entergy (ETR) ).

Reaves manages the Virtus Reaves Utilities ETF (UTES) as well as other utility and infrastructure portfolios and separately managed accounts. Assets under management exceed $3 billion.

“Electric vehicles and the more people charging their cars in their garages at night, it’s good for public services,” Rhame says, noting that more EVs mean more energy demand – and power that’s in demand. at off-peak times of the day when utilities are underutilized. ability. “Climate change…to the extent that it creates more of an incentive to move from a fossil fuel-based power grid to a more renewable power grid, it’s a needle move. [for utilities] too,” adds Rhame. “It’s a 10 or 20 year trend.”

Regulated utilities can get a boost by replacing, for example, coal-fired power plants with wind farms. Utilities are allowed to earn returns on their capital base. They don’t earn back on their operating expenses. With a coal plant, fuel is an operating expense. Utilities pass on fluctuating costs to consumers, but overall no more money is falling on the bottom line.

With wind or solar power generation assets, there are virtually no operating expenses. It’s quite a capital cost. Thus, a utility can broaden its profit base by becoming renewable. It’s a bit like the utilities getting back the profits made by the coal suppliers.

There are other trends that are also benefiting the utilities sector, including grid resiliency—preparing places for storms—as well as population migration—Americans are moving south.

The utility stock isn’t just about big trends, Rhame points out. They are pretty good stable companies. As investors worry about recession, “I know what utility profits will be, I don’t really know what


S&P500

the gains are going to be or so [S&P] earnings estimates for 2023 are too high.

Utilities are less affected by the general economy and inflation, Rhame says. They also offer good dividend yields. The average return on the shares of the

Virtus Reaves Utilities ETF

is greater than 3%. The average return of a stock in the S&P 500 is less than 2%.

Now let’s move on to Rhame’s picks.

NextEra is the largest utility in the S&P 500 and a leader in renewable energy. The business also benefits from the migration with a majority of revenue generated in Florida.

“I think the stock has definitely been volatile,” Rhame says, noting that a Commerce Department investigation into solar imports has generated much of the recent volatility. The survey could have reduced the number of solar panels available to complete the projects. That threat appears to be behind the headline, as stocks are up 17% from their 52-week low in May.

Edison International

is a California-based utility and it’s trading at a lower valuation than most in part because of the threat of wildfires in the state. “We are sort of entering the season of wildfires. These are historically the scariest months to own the stock,” says Rhame. “Our thesis there is that [the state] did a very good job with their insurance fund to prevent major damage from the forest fires. The public services have also improved a lot in the management of fires. »

Exelon

(EXC) recently created an unregulated electricity supplier

Constellation Energy

(CEG).

Exelon

has “a bit of an older system. They probably wanted to spend more money on the distribution side, but they couldn’t because they had to support the [Constellation] generation company. Ram said. “Now it’s over the utility, it’s got better credit metrics, more valued stock.”

Hall

(ETR) operates in the southern United States and benefits from LNG and chemical plants in its service area. “There is higher potential industrial growth.”

Rhame’s five utilities are trading around 16% below analysts’ average price target. Their dividend yield averages 3.5%. It’s not bad. And with lower volatility, investors can sleep better at night if they choose to hold this quintet.

Write to Al Root at allen.root@dowjones.com