Utility Stocks Are Gaining Popularity With a Possible Recession

Mark Hake

This is not financial advice and you should not rely on my analysis to buy or sell any stock. I am not undertaking to induce you to buy or sell any securities. I am relying on the “publisher’s exclusion” in the Investment Advisers Act of 1940 to provide this information without any personalized or individualized investment advice.

Utility stocks are starting to become more popular, given their stable earnings, dividends, and growth rates. These 6 dividend-paying utility stocks will likely survive well if there is a recession. They will keep paying their dividends and their stock prices will tend to do better than average as a result.

  • NRG Energy (NRG): Texas power utility with 20% forecast earnings trading for 9.6 times forward earnings and a 3% dividend yield.
  • Edison International (EIX): This electric utility company has a 4.3% dividend yield and a forward P/E of 14 times with good earnings growth.
  • Pinnacle West Corporation (PNW): This Southwest U.S. utility has a 4.5% dividend yield, higher than its 4-year average of 3.79%, which implies its reversion to the mean target market value is higher.
  • FirstEnergy Corp (FE): This Akron, Ohio-based utility, which covers 5 mid-Atlantic states from Ohio to New York, pays a 3.7% dividend yield and has an attractive forward P/E multiple of just 15.8.
  • The AES Corporation (AES): This US and overseas utility has good earnings growth, an 11 times forward P/E multiple, and a stable 3.1% dividend yield which has been raised in each of the past 9 years.
  • UGI Corporation (UGI): This propane company is trading for 12.2 times forward earnings with good earnings growth along with a 3.5% dividend yield.

Utility stocks offer investors a good comfort for several reasons. For one, the utility often has a monopoly to deliver energy to its customers. This makes its revenue and cash flow secure enough to maintain growing dividends. Second, they tend to have reasonable valuations.

Our list of utility stocks has low price-to-earnings (P/E) multiples ranging from 9 to 16 times earnings. They also have good dividend yields that range from 3 to 5%.

NRG Energy (NRG)

NRG Energy is a Houston-based integrated power company that trades for just 11.6 times forward earnings (for 2023) and also has a 3% yield and growing dividends. It is one of the largest U.S. independent power producers. It has 6 million customers and generates 18 gigawatts of power generation capacity primarily in Texas.

NRG stock is attractive to bargain-focused investors due to its dividend yield with nine years of continuously paid dividends.

Analysts forecast $3.96 in earnings per share (EPS) this year and $4.76 next year. So, trading at $45.98 at the start of May 25, NRG stock trades for 9.7 times 2023 earnings estimates.

Moreover, the company has plenty of FCF to cover both its dividends and buyback programs. Last year it generated $493 million in cash flow from operations and paid out just $319 million in dividends plus $48 million in buybacks.

Edison International (EIX)

Edison International is an electrical power generator in Southern, Central, and Coastal California with over 15 million customers. The company is forecast to produce $4.52 in EPS this year and $4.85 in 2023.

At the opening price of $68.04 on May 25, this puts EIX stock on a forward P/E of 14 times. Moreover, given its $2.80 annual dividend, EIX stock has a dividend yield of 4.3%.

EIX has paid a dividend for the past 18 years on a quarterly basis. In fact, it has raised the annual dividend every year for the past 18 years. That should give investors comfort that this will occur in the future, recession or not. This fact will allow EIX to hold up well during a possible economic downturn.

The fact is that everyone needs to buy electricity and pay their electric bills even during a recession.

Pinnacle West Corporation (PNW)

Pinnacle West Corp is a Phoenix, AZ-based electric utility with good earnings growth and a reasonable valuation. Revenue is forecast to rise 3.1% in 2023 to $3.89 billion and 4% in 2024 to $4.05 billion. In addition, analysts forecast that EPS will rise to $4.22 next year, and in 2024 it should gain 6.4% to $4.49 per share.

As a result, as of May 25, at $77.79, PNW stock trades on a forward 18.4 times P/E multiple. That is slightly lower than its average P/E over the past five years. Morningstar says that its average has been 17.7 times.

In addition, PNW has a $3.40 dividend which puts PNW stock on an ample dividend yield of 4.5%. In fact, PNW has paid dividends annually for the past 28 years and in the last 10 years, the dividend has risen each year.

FirstEnergy Corp (FE)

FirstEnergy Corp is an Akron, Ohio electric utility that operates in six Mid-Atlantic states from Ohio to New York with 6 million customers. The utility has good sales and earnings prospects.

Analysts forecast sales to rise 3% and EPS by 6% to $2.55 in 2023. The next year, analysts predict it will rise another 7.3% to $2.74.

At $43.24 per share on May 25, this puts FE stock on a forward P/E multiple of 17 times. That is lower than its average forward P/E of 23.6 over the past five years, according to Morningstar.

In addition, the company pays a solid $1.56 dividend per share, giving it a yield of 3.61%. In addition, the company has paid dividends for the past 24 years, although it has not raised them in a good number of years.

The AES Corporation (AES)

The AES Corp is a U.S. and global power distribution and generation company. Based in Arlington, Virginia, it operates in a number of countries beyond the U.S. They include Puerto Rico, El Salvador, Chile, Colombia, Argentina, Brazil, Mexico, Central America, the Caribbean, Europe, and Asia.

AES Corp has good sales and earnings prospects. For example, this year sales will rise by 1.7%. Earnings will gain 6.5% to $1.62. Next year, AES is forecast to see sales up 4.2% and EPS is forecast to gain 8.9% to $1.76.

At $21.18 on May 25, that puts AES stock on a forward P/E of just 13.1 times for 2023. Moreover, given its 63-cent dividend per share, the forward dividend yield is 3.1%.

UGI Corp (UGI)

UGI Corp is a propane and natural gas distribution and marketing company, and an electric power plant company based in King of Prussia, PA.

UGI stock is forecast to show 10.6% sales growth this year but a slight decline in EPS. 2023 revenue is expected to rise 4.1%, and 2023 EPS is expected to rise 10.8% to $3.24.

At $41.22 per share on May 25, UGI stock trades on a forward P/E of just 12.7 times forward 2023 earnings. In addition, it pays a solid 3.5% dividend yield, after having raised the dividend in each of the past 18 years.

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Mark R. Hake, CFA writes articles at InvestorPlace.com, Barchart.com, Medium.com, and Newsbreak.com as well as a Beehiiv free newsletter on stocks and cryptos.

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Mark Hake is a financial analyst, investor, and Chartered Financial Analyst (CFA). He writes about US and foreign stocks as well as cryptos, hedge funds, and private equity. He previously ran his own hedge fund, investment research firm, and acted as CFO for a fintech startup. He focuses on finding value, arbitrage, and hidden asset opportunities.

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