Infrastructure

Deutsche Bank Still Has 5 Top Pick Utilities to Buy Now

Lee Jackson

Published: September 22, 2016 10:05 am

Last Updated: January 13, 2020 3:17 am

Wednesday came and went pretty much as expected. The Federal Reserve didn’t raise interest rates, but it was pretty clear that a rate increase could be in the cards in December. Once again, even if the Fed does raise in December, the federal funds rate will still be below 1%, and historically that is still way below normal levels. While many firms have turned negative on the bond proxy stocks like utilities, real estate investment trusts and telecoms, the bottom line is they still offer some opportunity for more conservative investors.

A new Deutsche Bank research report recapitulates the firm’s overall forecast for 2016 that was published late last year, and it notes that while utilities have given up about half of their year-to-date gains since July, they still remain rich on a valuation level.

Deutsche Bank has a very selective list of five top pick utility stocks to Buy. All make good sense for income investors looking for dividends and relative safety.

American Electric Power

This industry leader is also a solid dividend-paying company. American Electric Power Co. Inc. (NYSE: AEP) is one of the largest electric utilities in the United States, delivering electricity to more than 5.3 million customers in 11 states. It ranks among the nation’s largest generators of electricity, owning nearly 38,000 megawatts of generating capacity in the United States. It also owns the nation’s largest electricity transmission system, a more than 40,000-mile network that includes more 765 kilovolt extra-high voltage transmission lines than all other U.S. transmission systems combined.

Many on Wall Street feel that the stock trades at a discount to its utility peers and they feel it deserves a premium. The company posted solid second-quarter numbers that exceeded consensus expectations. While industrial sales declined for a third year, it remains a stock the analysts favor.

Shareholders are paid a solid 3.38% dividend. The Deutsche Bank price objective for the stock is $72, and the consensus target price is $71.32. Shares closed on Wednesday at $66.19.

CMS Energy

This stock offers a solid dividend and good upside potential. CMS Energy Corp (NYSE: CMS) operates as an energy company primarily in Michigan through three segments. The Electric Utility segment engages in the generation, purchase, transmission, distribution and sale of electricity to residential, commercial and diversified industrial customers in lower Michigan.

The Energy Utility segment is involved in the purchase, transmission, storage, distribution and sale of natural gas. This segment’s gas transmission, storage and distribution system comprises 1,686 miles of transmission lines; 15 gas storage fields with a total storage capacity of 309 billion cubic feet and a working gas volume of 151 billion cubic feet; 27,537 miles of distribution mains; and seven compressor stations with a total of 157,939 installed and available horsepower. The Enterprises segment engages in the independent power production and marketing activities.

CMS shareholders are paid a 2.85% dividend. The Deutsche Bank price objective is posted at $46. The consensus target is $45.25, while the shares closed most recently at $43.60.

Exelon

This top utility stock also makes good sense now for conservative accounts. Exelon Corp. (NYSE: EXC) is the nation’s leading competitive energy provider, with 2014 revenues of approximately $27.4 billion. Headquartered in Chicago, Exelon does business in 48 states, the District of Columbia and Canada. Exelon is one of the largest competitive U.S. power generators, with approximately 32,500 megawatts of owned capacity comprising one of the nation’s cleanest and lowest-cost power generation fleets.

The company’s Constellation business unit provides energy products and services to more than 2.5 million residential, public sector and business customers, including more than two-thirds of the Fortune 100. Exelon’s utilities deliver electricity and natural gas to more than 7.8 million customers in central Maryland, northern Illinois and southeastern Pennsylvania.

Exelon investors receive a 3.65% dividend. Deutsche Bank raised its price target to $40. The consensus target is $38.47 and the stock closed Wednesday at $34.85.

NextEra Energy

With a very strong balance sheet, and this company looks poised for a solid second half of 2016. NextEra Energy Inc. (NYSE: NEE) is a leading clean energy company with consolidated revenues of over $17.0 billion and approximately 44,900 megawatts of generating capacity, which includes megawatts associated with noncontrolling interests related to NextEra Energy Partners.

Headquartered in Juno Beach, Florida, NextEra Energy’s principal subsidiaries are Florida Power & Light Company, which serves approximately 4.8 million customer accounts in Florida and is one of the largest rate-regulated electric utilities in the United States, and NextEra Energy Resources, which, together with its affiliated entities, is the world’s largest generator of renewable energy from the wind and sun.

Top analysts feel the company may very well be one of the top total return plays out of the large cap regulated space in the sector. One of the key drivers of NextEra’s growth has been the renewable energy development program, which continues to expand as the company adds new projects to its backlog. Those projects are expected to help grow 6% to 8% compound annual growth in adjusted earnings per share through 2018. Most on Wall Street feel that the steady earnings growth should also provide consistent dividend growth over that same time frame.

Shareholders receive a 2.72% dividend. The $133 Deutsche Bank price target is near the consensus target of $133.94. The stock closed Wednesday at $127.84.

PG&E

This is another utility rated Buy at Deutsche Bank that investors can feel super comfortable owning now. PG&E Corp. (NYSE: PCG) is one of the largest combined natural gas and electric utilities in the United States. Based in San Francisco, with more than 20,000 employees, the company delivers energy to nearly 16 million people in Northern and Central California.

The company operates 141,215 circuit miles of electric distribution lines, 18,616 circuit miles of interconnected transmission lines, 42,141 miles of natural gas distribution pipelines and 6,438 miles of gas transportation pipelines. It operates generation facilities with energy sources such as nuclear, hydroelectric, fossil fuel-fired and photovoltaic.

PG&E shareholders receive a 3.08% dividend. Deutsche Bank has a $67 price target, largely in line with the consensus number of $67.33. Shares closed on Wednesday at $63.71.

The huge capital gains for the sector from the quantitative easing days may be way in the rear-view mirror, but that doesn’t change the upside potential, albeit small, for these top companies. Even with potential rate increases starting to hit the tape again in December, they will remain small and very slow and should have a negligible effect. These top stocks make excellent additions to growth and income total return portfolios looking for safety now.