3 Undervalued Dividend Payers

All conventional metrics for valuing utilities using earnings, book value, and dividend yield have come down from the record peaks reached earlier this year. We think the following utilities offer investors an opportunity for capital appreciation and yield well above the peer group.

Edison International EIX will always contend with California political risk. However, California's progressive energy policies also create more growth opportunities than most other U.S. utilities have. Edison's electric-only business, recent regulatory success, and $5 billion annual investment plan give us confidence that the company can increase earnings 6% annually beyond 2020. Edison has stakeholder support to harden the grid against natural disasters, integrate renewable energy, and support electric vehicle adoption. Now with the stock trading at a sizable discount to its peers and offering a nearly 5% yield, Edison offers a triple play of value, growth, and income.

We think Duke Energy's DUK valuation discount to peers is unjustified, given the company's favorable regulation and investment opportunities that support consistent earnings and dividend growth. Florida remains one of the most constructive regulatory jurisdictions, with sector-leading allowed returns on equity, automatic rate base adjustments, and strong growth investment potential. North Carolina continues to support Duke's growth investments in electric and gas transmission and distribution infrastructure. South Carolina's recent rate-setting decision was disappointing, but we think Duke has enough growth in the state to compensate. With the Atlantic Coast Pipeline pipeline canceled, management can now focus on executing its sizable regulated growth opportunities.

Southern SO is undergoing one of the most dramatic transformations in the usually stodgy world of regulated utilities. In 2000, almost 80% of electricity sold to customers was generated using coal. We estimate it will be less than 20% by 2030, and the company recently announced a goal of low- and no-carbon generation by 2050 that will probably require the closure of the remaining coal plants. Nuclear, natural gas, and renewable energy are all increasing their share of generation. Southern has been providing investors with annual dividend increases of 3.0% to 3.5% for the past 10 years, and we expect increases to continue at about this rate.

Andrew Bischof, Travis Miller, and Charles Fishman provided the analysis for this report.