PSEG’s Long-Term Growth Plan on Track; 6% Dividend Raise

We are reaffirming our $65 fair value estimate for Public Service Enterprise Group PEG after the company announced it earned $3.47 per share in 2022 on an adjusted basis, down from $3.65 in 2021. This is in line with our forecast. We are maintaining our narrow moat and stable moat trend ratings for PSEG.

PSEG raised its dividend 6% to $2.28 per share annualized, in line with our expectations. The new dividend implies a 3.7% yield as of Feb. 21, higher than the sector average. The stock trades at a 6% discount to our fair value estimate and is one of only four U.S. utilities we cover with a 4-star rating.

The drop in earnings was due to divestitures and other changes at PSEG’s nonutility business, which we expect will shrink to about 15% of consolidated earnings in 2023. We consider performance at the core utility, PSE&G, to be the best indicator of future earnings. 2022 PSE&G earnings were up 9%, or $0.25 per share, from 2021.

We continue to forecast 7% long-term annual earnings growth off our 2023 normalized earnings forecast as PSE&G capital investment accelerates during the next four years. Our growth estimate is at the high end of management’s 5%-7% target. Our 2023 earnings estimate is in line with management’s updated $3.40-$3.50 EPS guidance after adjusting for pension expense changes.

We continue to assume PSEG invests $18 billion during the next five years, at the high end of management’s 2023-27 plan. We think management underestimates the investment opportunities in the later years of its plan. We expect more details at PSEG’s investor day in March.

We think the most likely source of new investment will be onshore electric infrastructure to support offshore wind projects in New Jersey. This could be a $7 billion opportunity during the next 20 years. The timing of early projects will depend on federal government guidance related to renewable energy and related infrastructure tax credits in the 2022 Inflation Reduction Act.