Susan Dziubinski: After starting the year strong, utilities stocks have retrenched since mid-September, creating a compelling opportunity for investors seeking income. Morningstar thinks that valuations in the utilities sector haven't been this attractive in years. 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. In fact, Morningstar expects that the North American utilities its analysts cover will raise their dividends by 6%, on average, next year. Here are three utilities with sizable dividend growth potential whose stocks are trading at cheap prices.
3 Undervalued Stocks with Dividend Growth Potential
These 4- and 5-star stocks are considered undervalued. Data as of Nov. 10, 2022.
- Edison International EIX
- Public Service Enterprise Group PEG
- NiSource NI
First there's Edison International EIX. Edison's stock tends to trade at a discount to most U.S. utilities, which makes sense, given the political, regulatory, and operating challenges that utilities in California face. Edison nevertheless offers among the highest yields in the sector. Morningstar forecasts that Edison will extend its 18-year-long dividend growth streak with 5% average annual increases through 2025. And California's aggressive clean energy goals offer Edison more growth opportunities than most utilities; Morningstar expects earnings to grow 7% annually during the next few years. We think shares are worth $73 apiece. Next is Public Service Enterprise Group PEG. The company has completed its transition to a predominantly regulated transmission and distribution utility. Its departure from the wholesale power generation business reduces risk, improves its environmental profile, and should attract more income-oriented investors. The company's plan to invest $15 billion at its regulated utility plus several billion dollars in clean energy projects during the next five years supports our 7% annual consolidated earnings growth outlook. We expect 5% annual dividend growth for the foreseeable future, and we think shares are worth $65 apiece. Last is NiSource NI. Morningstar analysts project 8% average annual earnings growth through 2025, among the industry's highest. We expect dividend growth will remain above the average, too. NiSource continues to increase its investments in electric grid infrastructure and renewable energy. We think the firm is well positioned for the clean energy transition, and the constructive regulatory frameworks in which its utilities operate is a plus. Our fair value estimate for NiSource is $32 per share.
For more stock ideas, subscribe to Morningstar's channel and visit Morningstar.com. Morningstar strategist Travis Miller and senior analyst Andy Bischof provided the research behind this segment. Watch 3 Cheap Stocks for Patient Investors for more from Susan Dziubinski.