We recently compiled a list of 10 High Growth Utility Stocks To Invest In. In this article, we will look at where Essential Utilities (NYSE:WTRG) ranks among the high growth utility stocks to invest in.
According to a report by Goldman Sachs Research, the US electricity demand is set to surge in the coming years, driven in part by the growing need for power to support the increasing use of artificial intelligence (AI) and data centers. After a decade of roughly zero growth in power demand, the US is expected to experience a significant increase in electricity consumption, with demand rising by around 2.4% between 2022 and 2030.
The report estimates that around 0.9% of this growth will be driven by the increasing power needs of data centers, which are expected to use 8% of US power by 2030, up from 3% in 2022. This surge in demand will require significant investment in new generation capacity, with US utilities needing to spend around $50 billion to support data centers alone.
Furthermore, the report notes that the incremental power consumption of data centers will also drive an increase in natural gas demand, with an estimated 3.3 billion cubic feet per day of new demand expected by 2030. This will require new pipeline capacity to be built to meet the growing needs of the data center industry.
In contrast, the report highlights that Europe’s power demand has been declining over the past 15 years, largely due to a series of economic shocks, including the global financial crisis, the COVID-19 pandemic, and the energy crisis triggered by the war in Ukraine. Despite this, the report notes that Europe will still need to invest over $1 trillion to prepare its power grid for the increasing demands of AI and electrification.
Investors Are Plugging into the Utility Sector Amid the AI Boom
In an interview on Yahoo Finance, Pavel Molchanov, Managing Director at Raymond James, discussed the growing connection between the utility sector and the emerging trend of Artificial Intelligence (AI). Molchanov shed light on why utilities have become an unexpected beneficiary of the AI boom.
According to Molchanov, as the world becomes increasingly reliant on data centers to power AI technologies, the demand for electricity is expected to surge. This has led investors to take notice of the utility sector, which is poised to benefit from the growing need for power. Molchanov noted that while utilities are a regulated industry with fixed prices, the overall electricity demand is ultimately driven by the economy. Therefore, if data centers can create growth in overall US power demand for the first time in 20 years, it would be a positive development for utility companies.
Molchanov emphasized that utilities are still a defensive play but with a twist. The sector is expected to experience a modest growth rate of 2-3% per year, driven by the increasing demand for electricity. This growth is significant, considering that the US electricity demand has been stagnant since 2007.
The conversation also touched on the regional variability in the utility sector, with certain areas being more attractive for data centers due to lower electricity prices. Molchanov mentioned Virginia, Ohio, and Texas as regions that are well-positioned to benefit from the growth in data centers, while California is less attractive due to its high power prices.
The increasing use of AI and data centers will have a significant impact on the global energy landscape. The need for significant investment in new generation capacity and infrastructure to support this growth is clear. With that in context let’s take a look at the 10 high growth utility stocks to invest in.
Our Methodology
To compile our list of the 10 high growth utility stocks to invest in, we used the Finviz and Yahoo stock screeners to find the 50 largest companies utility companies. We then narrowed our choices to 10 companies with the highest 5-year revenue growth. We also included their hedge fund sentiment, which was taken from our database of 912 elite hedge funds as of Q2 of 2024. The list is sorted in ascending order of their of their revenue growth.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Essential Utilities (NYSE:WTRG)
5-Year Revenue CAGR: 17.86%
No of Hedge Fund Investors: 9
Essential Utilities (NYSE:WTRG), previously known as Aqua America, is a water and natural gas utility company serving several U.S. states. The company operates primarily in regulated markets, offering water, wastewater, and natural gas distribution services.
In Q2, Essential Utilities (NYSE:WTRG) results were decent, despite weather headwinds, and the company’s guidance for 2024 remains encouraging. The company’s five-year capital spending plan can deliver 8% annual rate base growth for the regulated water segment and 10% annual rate base growth for the regulated natural gas segment, providing a realistic path to its adjusted diluted EPS growth target.
The company’s positive rate case outcomes on the horizon, including the Peoples Gas rate case in Pennsylvania and the Pennsylvania water rate case, can provide a boost to its annual operating revenue. Essential Utilities’ (NYSE:WTRG) strong financial health, with a debt-to-capital ratio of between 50% and 55% and an interest coverage ratio of 3.3, supports its dividend growth.
Essential Utilities (NYSE:WTRG) is a high-quality dividend stock that offers a safe and reliably growing dividend. The company’s strong balance sheet, high-interest coverage ratio and positive rate case outcomes on the horizon make it an attractive investment opportunity. The company’s earnings are projected to increase by 9.23% in the current year. With a consensus Buy rating from industry analysts, the stock has a target price of $46.00, which represents a 16% upside potential from its current level.
Overall WTRG ranks 7th on our list of the high growth utility stocks to invest in. While we acknowledge the potential of WTRG as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than WTRG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure. None. This article is originally published on Insider Monkey.