According to Morningstar, the utilities sector has made a stunning turnaround from a 2023 slump, rising on hopes for artificial intelligence, with more room to go. Utilities are up about 10% in 2024, driven by a surge in expected electricity demand to power AI data centers. This marks a reversal from last year, when the sector was hit hard by rising interest rates and suffered a 10.2% decline. A high-interest rate environment not only makes borrowing more expensive for utilities, but it also makes their dividend yields less attractive compared to the risk-free rates investors can get from government bonds. “I think the market has ignored and underestimated what utilities can accomplish,” Travis Miller, energy and utilities strategist at Morningstar, told CNBC. In fact, the sector bottomed in early October and has since risen more than 25% by Thursday’s close. “When a sector is up 30%, there’s not a lot of room to go up, but I think utilities are very well positioned financially and have a lot of opportunity for growth,” he added. “Yields remain competitive and should translate into attractive returns for investors in the near term.” He highlighted his team’s four top picks: NiSource, Entergy, WEC Energy and Duke Energy. Earlier this week, Indiana Governor Eric Holcomb announced that Microsoft will build a $1 billion data center in LaPorte, Indiana. NiSource subsidiary Nipsco will provide electricity and natural gas to the new facility. “This announcement strengthens our confidence that NiSource will invest at least $17 billion in its electric and gas network over the next five years and supports our base forecast of 7% annual revenue growth,” Miller wrote in a report on Wednesday. NiSource’s access to low-cost energy resources makes it ideally positioned geographically to benefit from further development of manufacturing and data centers, he added, noting that Virginia utilities already supply data centers in the region with gas for on-site generation. Miller reaffirmed his fair value of NiSource at $34 per share this week, up nearly 20% from Thursday’s closing price. NiSource has a 3.7% dividend yield and its shares are up nearly 7% through 2024. Another stock that should get a boost from the growth of AI data centers is WEC Energy. Last month, Microsoft announced it would expand its domestic cloud and AI infrastructure capacity by $3.3 billion by developing a data center campus in Mount Pleasant, Wisconsin. The tech giant is already building a data center in the area, which is scheduled to open in 2026. “Microsoft’s first data center will be a 1,000-story facility,” WEC Energy said in a statement. [megawatts] “This figure represents more than 10% of WEC’s current in-state load,” Morningstar analyst Andrew Bischoff wrote in May. “This supports WEC management’s projection of 4.5% to 5% annual electricity demand growth in 2026-28, the highest among U.S. utilities.” He estimates WEC Energy’s fair value at $96 per share, reflecting a 19.5% increase from Thursday’s closing price. The stock yields 4.2% and is declining by nearly 5% to 2024. A rise in industrial customers on the Gulf Coast could be a tailwind for Entergy, which will also get a boost from growing demand for renewable energy, Miller said. His team expects the company to invest an average of $7 billion per year in upgrading its power grid and expanding its clean energy portfolio. The company has also raised its dividend by about 6% each of the past three years, its biggest increase since 2010. The stock currently yields 4.1%, and its share price is down nearly 5% in 2024. It’s expected to rise to nearly 8% in 2024. “As Entergy reaches the peak of its growth investment plan, we expect dividend growth to slow slightly more than earnings growth,” Miller said. He sees a fair price of $123 a share, which would reflect an increase of about 12% from Thursday’s closing price.
4 utilities with attractive dividends and upside potential, according to Morningstar
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