Utilities: Investors Counting on Growth to Stop Recent Slump

Utilities’ historic 2024-25 rally is now history. Since hitting an all-time peak in February, the Morningstar US Utilities Index is down 16%, while the US market is up 13%, both including dividends. Utilities have gone from the best-performing sector during the last two years to the worst-performing one since February. All of utilities’ relative gains against the market since 2024 are gone.

Two concerns have fueled the downturn. First, rising interest rates are finally catching investors’ attention. Utilities stocks rallied the last two years, even as interest rates doubled. Dividend yields hit all-time lows below 3% early this year, an historically wide discount to interest rates. Utilities’ yields have come up from those lows but still have a long way to climb—and stocks a long way to fall—to catch interest rates.

Second, data center energy demand growth is hitting regulatory hurdles. We still expect utilities to benefit from data center growth, but that growth could take longer than investors initially expected. Power producers that led utilities’ 2024-25 rally have led the recent slide as they struggle to fulfill investors’ high growth expectations.

One upside for investors is that utilities’ valuations are more reasonable. The sector is 9% undervalued as of late September based on our fair value estimates, the cheapest since early 2024. The sector’s median 19 P/E is in line with its 20-year average, yet growth prospects are much better, suggesting current valuations don’t fully capture the growth we think is coming. Investors could find some good bargains.

Dividend yields for many US utilities are climbing as their stocks fall. But dividend yields remain at historic lows relative to interest rates. The 200-basis-point gap between utilities’ dividend yields and 10-year US Treasury yields is a concerning signal for investors. Market crashes in 2000 and 2008 happened shortly after this yield spread hit current levels. Utilities’ investment opportunities to support accelerating energy needs from data centers are supporting above-average earnings.

Top Utilities Sector Picks

Alliant Energy LNT

• Fair Value Estimate: $77.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Low

We estimate Alliant’s annual earnings growth at the high end of management’s 5%-7% guidance through 2027, with more than 7% growth in 2027 and beyond. Alliant’s four-year $13.4 billion capital investment plan is up 24% from its prior four-year plan and double its 2021 investment plan. We continue to incorporate additional capital, as none of the potential 2 GW-4 GW of data center development is included in its base plan, backed by constructive regulation in Iowa and Wisconsin. Alliant has four data center customers supporting 3.4 GW of peak demand, driving 60% sales growth by 2031. Three data center campuses have started construction, and the fourth has a signed electric service agreement.

Edison International EIX

• Fair Value Estimate: $81.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

Investors’ overwhelming concern remains Edison’s current and future wildfire-related liabilities, particularly those associated with the January 2025 Eaton Fire. California politicians failed to address wildfire concerns during the summer legislative session, temporarily sending Edison’s stock to 52-week lows. Edison should have access to California’s $21 billion AB 1054 Wildfire Fund, which would limit Eaton Fire losses, but investors remain nervous about the fund’s long-term sustainability if more fires erupt. Edison’s plan to invest $8 billion annually supports our outlook for 7% average annual earnings growth.

DTE Energy DTE

• Fair Value Estimate: $157.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Low

DTE’s service territory around Detroit, Michigan, hasn’t had core energy demand growth for more than a decade. Data centers are set to change that and boost DTE’s earnings growth. DTE’s capital investments to serve new Oracle and Google data centers, add renewable energy, and improve reliability support our 7% core annual earnings growth through 2030. Growth could top 8% annually with more data center investments. After trading at a valuation discount to peers for many years, we think DTE’s stock deserves a premium given its transparent growth, upside, and regulatory support.