Utilities, a staple in retiree portfolios because of their stable dividends, have emerged as a hot corner of the market in 2024, with UBS highlighting the group as its “most favored” sector in August. Publicly traded utility stocks have soared nearly 19% in 2024, trailing information technology and communication services, as investors see utilities as another way to capitalize on the artificial intelligence trend. Moreover, dividend yields will become more attractive if Treasury yields fall, and borrowing costs will become less onerous if the Fed cuts interest rates, as is widely expected. .GSPU YTD Mountain In the third quarter of 2024, utilities stood out, up 10% through Friday. This compares with technology, up 0.5%, and communication services, down more than 2%. Electricity demand is expected to grow by as much as 20% by 2030, with artificial intelligence data centers adding an estimated 323 terawatt-hours of electricity demand by then, according to an April analysis by Wells Fargo. UBS strategist James Dobson named NextEra Energy as his “top pick” among utilities to ride this trend, the bank’s Chief Investment Officer Global Wealth Management wrote in a report published last week. NextEra, the parent of Florida Power & Light and NextEra Energy Resources, has a 31% upside to 2024 and a 2.6% yield. “With a clear competitive advantage in renewable energy development in the U.S. and an attractive valuation, we believe NEE is well positioned to outperform the sector over the next 12 months,” Dobson wrote. He noted that the company is “highly well-positioned” to benefit from rising electricity demand related to AI data centers, reshoring and electrification. In fact, NextEra Energy Resources, which operates wind and solar projects, added more than 3,000 megawatts of new renewable power and storage projects to its backlog in the second quarter. That includes a deal with Google to supply 860 megawatts to its data centers, NextEra CEO John Ketchum said on the company’s July 24 earnings call. UBS isn’t the only one recommending NextEra Energy. LSEG said 16 of the 23 analysts covering the stock rate it a buy or strong buy, but the consensus price target is only about 3% upside from current levels. Dobson and his team removed Vistra, which supplies electricity in Texas, from the firm’s “top picks” list, but it still lists it as a “top pick.” Vistra shares have surged nearly 123% in 2024, but are roughly flat in the third quarter. The company offers a modest 1% dividend yield. “As an independent power producer, VST has fewer defensive factors than other regulated utilities in the sector,” UBS noted in the report. Independent power producers are less regulated because they are not public utilities. Rather, it produces electricity to sell to other customers, including other utilities and end users. Still, the company’s shares are highly favored on Wall Street, with about 92% of analysts covering Vistra rating the company a “buy” or “strong buy,” according to LSEG. Analysts’ consensus price target forecasts an upside of about 29% from the current price.
This fast-growing sector rose 10% in the third quarter. How to invest
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