The utility sector is in the midst of a business and technology
transformation in the U.S. Now with Obama's boldest attempt to
address global warming, utilities are shifting their mode of power
generation from coal-fired electricity plants to natural gas and
alternate energy sources with even more urgency. Global concerns
about the pitfalls of green-house gas emissions supported by
increasing restrictions on fossil-fuel usage have brought
alternative energy into the limelight. The president's proposed new
Environmental Protection Agency rule would reduce carbon emission
from power plants by 30% by 2030, compared to 2005 levels.
This shift from carbon to renewables has been happening for quite
some time now. However, with the fresh carbon regulations on the
way, the U.S. Energy Information Administration (EIA) forecasts
approximately 60 gigawatts (GW) of coal plants, or 6% of the
country's total capacity, will be forced to shut down by the end of
the decade to meet evolving standards and regulations.
However, this shift will bring about inevitable changes in the
energy economy. Looking at the economic perspective, the rules
could cost the U.S. economy $50 billion per annum with the forced
shutdown of coal-fired plants by 2030, eliminating 224,000 jobs,
according to the U.S. Chamber of Commerce.
Although the recent regulation could pose a threat to the sector,
let's not forget that utility services play a major role in a
nation's economic progress, as cheap and abundant supply of power
keeps the wheels of development rolling.
Admittedly, the fortunes of some industries are more allied to the
overall economy than others, very few have shown as little
volatility and are as stable as the utility sector. The times are
indeed uncertain given the Iraqi insurgency, the lingering
political tensions between Russia and Ukraine, concerns of a
slowdown in China and less-than-expected growth in Japan. To add to
the woes, the World Bank has cut its global economic growth
forecast lately, sending jitters across the equity markets. For
risk-averse investors the utility sector seems to be a good bet in
uncertain times. Demand for utility services stay primed no matter
what the economy is doing.
Moreover, utilities have been known to pay dividends consistently,
thereby retaining the confidence of yield hungry investors and
proving yet again the sector's defensive characteristics.
Given this backdrop, selecting the correct stocks may appear to be
a daunting task. Given the positive sentiment, it might be a good
idea to bet on three top ranked utility stocks that are soaring on
the bourses this year.
New Orleans, LA based Entergy is primarily engaged in electric
power production and retail distribution of power.
This Zacks Ranked #1 (Strong Buy) stock delivered positive earnings
surprises in the last four quarters with an average beat of 6.15%.
The company posted impressive first-quarter 2014 results with its
earnings outpacing the Zacks Consensus Estimates on higher
wholesale electricity prices owing to a harsh winter and higher
revenues from the northeast nuclear fleet in the U.S.
Entergy has already accomplished the required emission cuts by
making the plants more efficient and relying heavily on nuclear
power, which does not directly emit carbon dioxide. Hence,
Entergy's nuclear fleet gives the company a distinct advantage over
its fossil-fuel based competitors.
The cost-cutting efforts at Entergy, strong industrial growth in
the Gulf Coast and improvement in forward power prices in the
Northeast will help the company to sustain its strong performance.
Retail sales growth in its service territories will further benefit
Entergy continues to focus on maximizing shareholder value through
regular dividend payouts, backed by a stable financial position.
Currently, the company has an annual dividend yield of 4.2%, much
higher than the industry average of 3.4%. With a forward P/E of
12.74x, the stock price has gained an impressive 29.6% year to
NRG Energy Inc.
NRG Energy, another Zacks Rank #1 (Strong Buy) stock, is
diversifying its generation mix with the expansion of renewable
assets. The company's recent acquisition of the assets of Edison
Mission Energy, a subsidiary of
), and Roof Diagnostics Solar will support its renewable asset
The company's power plants generate electricity using a wide array
of fuel sources with gas accounting for 54% last year. The stock
price has increased 31.3% so far this year and it has a forward P/E
The company has a long-term expected growth rate of 6.4%. The
addition of renewable assets and the inking of long-term power
supply contracts will enable NRG Energy to secure a stable cash
inflow going forward.
Companhia Paranaense de Energia
Companhia Paranaense de Energia, also known as COPEL, is a fully
integrated electric utility in Brazil. The company is engaged in
the generation, transmission and distribution of electricity to the
State of Paraná.
This Zacks Ranked #1 (Strong Buy) company posted impressive results
for first-quarter 2014 with its net income surging 46.3% year over
year. COPEL has solid long-term growth prospects, as the country
steps up its focus on infrastructural developments and investments
aimed at improving electricity generation capacity.
The Brazilian electricity market is the largest in South America.
Energy consumption in the country rose 3.5% last year. With a
market cap of $4.08 billion, COPEL has a long-term expected growth
rate of 10.45%.
With a forward Price/Earnings (P/E) of 7.45x, the stock surged
25.1% so far this year and still has enough fundamentals to drive
it upward. Its annual dividend yield of 4.2% is higher than the
industry average of 3.4%. This makes the company an attractive bet
for investors looking for steady income.
The biggest positive for the utilities is that there is hardly any
viable substitute for their services. This is the most fundamental
strength of the industry. Moreover, increasing demand drives this
We expect more investment in natural gas and alternate energy
projects, wrenching the initiative from the pure-play coal based
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