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NEE, SO, and DUK: Analyzing Current Valuations

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Top utility stocks

Many top utility stocks are trading at a significant premium to their historical averages. NextEra Energy (NEE) stock is trading at 24x its forward earnings—based on analysts’ estimates. NextEra Energy’s five-year historical average valuation is ~18x–19x. NextEra Energy stock has maintained its uptrend for the last several months due to its consistently faster-than-average earnings and dividend growth. Utilities are trading at ~19x their forward earnings.

XLU stk

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Southern Company (SO), one of the biggest regulated utility stocks, is trading at 18x, which is lower than its five-year historical average. Duke Energy (DUK), the second-largest utility by market cap, is trading at a forward PE ratio of 18x considering analysts’ earnings estimates for the next 12 months. Duke Energy looks fairly valued compared to its peers.

Utility stocks might look fairly valued compared to their historical averages. However, they look expensive compared to their slower earnings growth. Even if utility stocks yield ~3%, higher than broader markets, and close to 20x earnings for an estimated earnings growth of ~5%, they still look too expensive.

Some smaller names in the utility sector like AES (AES) and NRG Energy (NRG) are trading at forward PE ratios of 12x and 9x, respectively. However, both of these power companies offer relatively less stable earnings growth. NRG Energy pays trivial dividends. Regulated mid-size utility PPL (PPL) is trading at 13x the forward earnings. PPL offers a yield of 5.3%—one of the highest among its peers.

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