Does Xcel Energy Have Good Earnings Growth Prospects?
Xcel Energy’s earnings growth prospects
Minneapolis-based Xcel Energy (XEL) targets to grow its earnings per share 4%–6% in the future. The earnings growth will likely to come from investments in its regulated rate base. Its capital spending plan of $18.0 billion is expected to grow the company’s regulated rate base 5.5% compounded annually for the next five years.
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Factors that could drive Xcel’s dividends
Xcel Energy’s almost entirely regulated operations result in comparatively stable earnings. Management is working on several fronts to steady its earnings growth in the future. One of the strategies includes Xcel Energy’s multiyear rate plans. The company files multiyear rate cases for rate recovery, which tend to reduce the regulatory lag.
Regulatory lag is the delay in the recovery of investments due to the time it takes regulators to approve rates. Multiyear rate cases offer regulatory certainty and effectively reduce regulatory lags. Xcel is planning to file multiyear rate cases in its principal operating states. Addressing regulatory lag issues in principal operating zones should improve its return on equity significantly in the next few years.
Is the Fed’s aggression a potential threat?
Even if the Fed remains hawkish in the future, US utilities‘ dividends seem healthy and backed by strong earnings. In the longer term, utilities might maintain the current yield premium of ~100 basis points to that of the ten-year Treasuries (TLT) if the Fed raises rates. However, we might see temporary weakness in utilities stocks after a rate hike is announced.
Read Hawkish Fed or Helpful Weather: What Will Drive Utilities in 2017? to learn more about how utilities (XLU) might be positioned in 2017.