Boring no more. Goldman says buy these utility stocks that are enabling a clean energy future

Published Thu, Jun 8 20232:03 PM EDTUpdated Thu, Jun 8 20233:05 PM EDT

Utility stocks are poised to capitalize on a clean energy future, according to Goldman Sachs. Utilities have lagged the market this year, with the Utilities Select Sector SPDR Fund down 5% so far in 2023 against the S & P 500's 11.5% gain. XLU YTD mountain Utilities Select Sector SPDR Fund However, with the rapid adoption of renewables in the past decade, utilities are entering a new phase as decarbonization enablers, said Carly Davenport, a Goldman analyst. The companies are now uniquely positioned to facilitate the shift to renewable energy as the United States' power grid undergoes a transformation, she added. "Looking forward, we see an attractive investment opportunity set, derisked by the Inflation Reduction Act (which has created incentives for utilities to transition away from fossil fuels to renewables), with potential to transform the earnings growth and shareholder base across Utilities, driving potential for stronger multiple premiums over time," she wrote in a note Wednesday. The shift to clean energy will require a "significant" amount of capital investment, which will contribute to attractive earnings and rate base growth, Davenport said. Industry capital expenditure estimates for 2023 through 2027 are about $93 billion, or 27% higher than capital spending during the prior five-year period, she pointed out. Goldman initiated coverage of several stocks in the utilities sector, looking at how the names were exposed to clean technology, nuclear generation, maintaining grid reliability and natural gas. In addition, affordability and regulatory considerations were considered. Among the names Goldman rated a buy are American Electric Power, NextEra Energy, Sempra and Southern Co. American Electric Power and NextEra Energy both hit several of Goldman's themes. The former should benefit from its exposure to renewables, nuclear and maintaining U.S. grid reliability, Davenport said. "With about 60% of AEP's 5-year capital plan being allocated towards transmission and regulated renewables, we see attractive rate base and earnings growth, in addition to actions taken to optimize the business and improve regulatory lag driving our positive view on the stock," she wrote. NextEra Energy is exposed to renewables, nuclear and favorable affordability/regulatory outcomes, Davenport said. "A robust renewables growth profile, a constructive regulatory and execution outlook at FPL [Florida Power & Light], and attractive relative valuation following underperformance drive our positive view on NEE," she wrote. Shares of both stocks are down about 11% year to date. American Electric Power's stock has nearly 16% upside to Goldman's price target, as of Wednesday's close. It also has a 3.9% dividend yield. NextEra Energy offers more than 21% upside to Goldman's price target, plus a 2.5% dividend yield. Meanwhile, Sempra is also an attractive growth opportunity, Davenport said. It has a significant project pipeline for LNG at its Sempra Infrastructure business and its Texas utility, Oncor, continues to benefit from strong consumer growth, she noted. Sempra's stock has shed about 4% so far this year and has 20% upside to Goldman's price target. In addition, it sports a 3.2% dividend yield. Lastly, Southern Co. will see a valuation rerating once units 3 and 4 come online at its Vogtle nuclear plant, Davenport said. "In addition, we have a constructive view on the company's regulated utility exposure, and see incremental upside opportunities not in our base case around energy transition investments, given that SO has expressed interest in renewables but has allocated limited capital to them thus far," she wrote. Shares of Southern are down about 2% in 2023 and have 14% upside to Goldman's price target. It also pays a 4% dividend yield. — CNBC's Michael Bloom contributed reporting.