The Top 4 Utilities for Value, Yield, and Upside Potential

Key Points

• Utility stocks are expected to post solid growth in Q3 2023 and grow steadily in 2024. 
• The group offers high-yield, diversification and safety for equity portfolios. 
• Analysts see these 4 stocks outperforming their peers this year. 

The Utilities NYSEARCA: XLU sector is not a glamorous one, but it will be among the top sectors for growth in Q3 2023 and full-year 2023. Its growth will also continue at a solid pace in 2024. The uncertain nature of the investment environment, the pace of inflation, and the FOMC’s next moves, are three reasons the sector is appealing for more than its growth.

Utilities are real assets with revenue and earnings insulated from broader economic worries; they tend to trade less volatile and pay market-leading dividends. This article looks at the top four utilities in a search using Marketbeat’s stock screening tool. This list is based on value, yield, and the analysts' expectations for upside price movement. 

DTE Energy Tops the List of High-Yield Utilities 

DTE Energy NYSE: DTE is a moderate-sized diversified utility operating in Michigan. It provides electric and gas services and some industrial products and is a Top-Rated Dividend Stock on the Marketbeat.com platform. 

The stock trades at roughly 17X its 2023 earnings estimates, which is high compared to the broad market but reasonable for this group. The 17X price tag comes with a 3.7% dividend yield, above the Utility Sector average, and the distribution is growing. The company pays about 70% of its earnings, which aligns with the sector, and the earnings growth outlook supports the distribution growth outlook. Earnings are expected to grow by 7% in 2024 to outpace the distribution CAGR. 

Regarding the analysts, there are seven with current ratings on DTE, and they have been active this year. The Moderate Buy is firming, and so is the price target. The analysts see this stock gaining 15% at the consensus mid-point and about 5% at the low end of the range. 

Ameren Corporation Has Double-Digit Potential 

Ameren Corporation NYSE: AEE is a diversified utility offering electric and gas services in Missouri and Illinois. The company's stock trades near the middle of the sector’s range at 18.5X earnings, with one of the healthiest outlooks for distribution growth. The stock yields about 3.12%. That's below the group average, but the payout ratio is only 56%, leaving ample room for additional distribution increases. 

The company has increased its dividend distribution for the last 10 years at a 6% CAGR. Regarding volatility, this stock trades with a beta of 0.45, making it less than half as risky as the average S&P 500 company. Analysts rate it a Moderate Buy and see it moving at least 10% higher at the consensus mark; the low price target of $80 assumes the stock is fairly valued at current prices and puts a floor in the market. 

CenterPoint Energy For Aggressive Dividend Growth 

CenterPoint Energy NYSE: CNP is among the higher valued utility stocks, but this is due to its distribution outlook. The company cut the distribution early in 2020 to preserve capital and has not fully reinstated the pre-pandemic payout. Based on the 53% payout ratio and business normalization, the company could easily return the payout to its former glory over the next two years. That would be worth 50% in distribution increases and help lift share prices. Until then, the analysts rate this stock a Moderate Buy and see it trading near $32, or about 10% above the current action. 

Deep-Value High-Yield American Electric Power Company 

American Electric Power Company NYSE: AEP is an electric-generating pure-play utility operating in the central US. It provides the deepest value-to-yield combination of any stock on this list at 15X earnings and over 4% yield. The yield is also among the safest in the group at 65% of earnings, and earnings are expected to grow this year and next. The analysts like this stock the best and rate it a solid Moderate Buy with a range of price targets that assumes about 2.5% of upside at the low end of their range. This stock also has the largest number of analysts following it. That figure has more than doubled over the past year.