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Morningstar Cites Three Undervalued Utility Stocks

The stocks have potential for substantial dividend growth, Morningstar says, with yields already at 3.6% or more.
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With volatility ruling in the stock market this year, utility stocks, with their promise of regular dividends and potential capital gains, are looking good.

Research firm Morningstar is particularly high on utilities.

“After starting the year strong, utilities stocks have retrenched since mid-September, creating a compelling opportunity for investors seeking income,” Susan Dziubinski, a Morningstar investment specialist, wrote in a commentary.

The Dow Jones U.S. Utilities Index has slid 12% since Sept. 12.

“Morningstar thinks that valuations in the utilities sector haven’t been this attractive in years,” Dziubinski wrote.

“Dividend yields on these stocks are back above 4%, on average. Plus, the balance sheets of utilities are the strongest they’ve been in 50 years, and growth opportunities abound.”

Morningstar analysts believe the North American utilities they cover will raise their dividends by 6%, on average, next year.

Dziubinski cites three utilities with hefty dividend growth potential that Morningstar thinks are significantly undervalued.

Edison International: Morningstar analyst Travis Miller assigns the company a narrow moat (competitive advantage) and puts fair value for the stock at $73. It recently traded at $61.

Edison is one of the cheapest U.S. utilities in terms of his fair value estimate and its price-to-earnings ratio, he said.

Edison's stock also has a 4.7% dividend yield, one of the highest in the sector. “We expect a 5% dividend increase in December, Edison's 19th consecutive annual dividend increase,” Miller said.

“We think this illustrates Edison's consistent track record of constructive regulatory outcomes and policy support for its clean energy and grid safety investments in California.”

Public Service Enterprise Group: Miller gives the company a narrow moat and puts fair value for the stock at $65. It recently traded at $57.

“Public Service Enterprise Group has completed its transition to a predominantly regulated transmission and distribution utility, much like its peers,” he wrote in a commentary.

“Its exit from the wholesale power generation business after more than two decades reduces risk, improves its environmental profile, and should attract more income-oriented investors.”

Further, “the plan to invest $15 billion at its regulated utility plus several billion dollars in clean energy investments during the next five years supports our 7% annual consolidated earnings growth outlook,” Miller said.

Ni Source: Miller assigns the company a narrow moat and puts fair value for the stock at $32. It recently traded at $26.

“Compared with other utilities, we think NiSource has more long-term investment opportunities relative to its size and better regulation,” he wrote in a commentary.

“The stock's 3.6% dividend yield and above-average growth relative to its peers suggests total returns should top most utilities' during the next five years.”

Miller predicts 8% annual earnings growth from 2021-26.

“NiSource's utilities have constructive regulatory frameworks that allow it to collect a cash return on the bulk of its capital investments within 18 months,” he said.

The author of this story owns shares of Public Service Enterprise Group and bonds of Edison International.