3 Utilities Stocks to Buy With the Sector At Its Cheapest Since 2009

The utilities sector is offering a rare opportunity for investors to buy high-quality stocks at very attractive prices.

U.S. utilities now trade at a median 15% discount to our fair value estimates. This matches the largest discount since the market bottoms in March 2009 and March 2020. Utilities’ median 16 P/E is at its lowest since exiting the 2008-09 recession.

We considered U.S. utilities 15% overvalued last August before the sector began a 25% slide, including dividends. The sector trails the Morningstar US Market Index by 30 percentage points year to date, after coming into the year slightly overvalued based on our fair value estimates.

The increasing probability of higher-for-longer interest rates has finally caught up to utilities. With the 10-year U.S. Treasury yield up to 4.7% from 3.3% in April, utilities’ dividend yields are less attractive, and financing costs will likely climb. The sector’s 3.9% dividend yield has been lower than the 10-year U.S. Treasury yield since August 2022—the first time since the 2008-09 recession.

Despite the negative sentiment, the sector’s fundamentals are strong. We think most utilities deserve premium valuations compared with historical averages, given their better growth prospects, improving rate regulation, and less volatile earnings.

We forecast a median 6% annual earnings per share and dividend growth across our coverage. Our top picks are utilities that we think can grow earnings and dividends faster and for longer than their current market valuations imply.

We have long warned investors that utilities with aggressive growth plans and high valuations would fall the fastest if interest rates rose. NextEra Energy NEE (down 38% year to date) and American Water Works AWK (down 21%) are among those that we long considered overvalued but now trade below our fair value estimates.

Top Utilities Sector Picks

Entergy ETR

• Fair Value Estimate: $120.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Low
• Forward Dividend Yield: 4.47%

Entergy offers one of the most attractive combinations of yield, growth, and value in the utilities sector, with a 4.6% dividend yield and a 7% annual earnings growth outlook. Entergy’s 14 P/E is a 15% discount to the sector average P/E. Above-average electricity demand growth, clean energy investments, and reliability/resiliency network investments are core growth drivers. Entergy also should benefit from industrial carbon emissions cuts, global energy demand, and green hydrogen development. We expect Entergy’s valuation discount to disappear as the market becomes comfortable with Entergy’s decadelong transition away from commodity-sensitive businesses.

NiSource NI

• Fair Value Estimate: $33.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Low
• Forward Dividend Yield: 3.69%

Even though NiSource trades at a similar valuation as its peers, we think it has one of the longest runways of growth in the sector. The firm’s transition from fossil fuels to clean energy in the Midwest supports at least a decade of growth potential. We expect NiSource to invest $15 billion over the next five years and as much as $30 billion during the next 10 years, leading to 7% earnings growth and similar dividend growth. It plans to close its last coal-fired power plant in 2028 and add wind, solar, and energy storage. The company’s six gas utilities have ample near-term investment and regulatory support in areas that support gas.

Duke Energy DUK

• Fair Value Estimate: $105.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Low
• Forward Dividend Yield: 4.51%

After divesting its renewable energy business, Duke has a clear pathway to achieving management’s 5%-7% annual earnings growth target. Duke’s $65 billion capital investment plan for 2023-27 is focused on clean energy and infrastructure upgrades to reduce carbon emissions. New legislation in North Carolina supports the clean energy transition. Florida offers opportunities for solar growth. Duke’s 4.6% yield is among the highest in the sector, but dividend growth will lag earnings growth until its payout ratio comes down.