For a long time, utility shares were viewed primarily as income stocks with dependable dividends.
Now, they are increasingly seen as growth stocks where huge levels of investment spending in areas such as green energy, energy security and environmental improvements can deliver strong and growing returns to shareholders.
Citywire Elite Companies Emea Awards, has shortlists in two utilities sectors: independent power producers (IPPs) and regulated networks.
Sector split
Some of the integrated electricity companies making the short list straddle both utilities sectors, but most fit into one of two camps.
- IPP companies that generate electricity from various energy sources. Historically, these have been power stations that create electricity from burning fossil fuels such as coal, oil and gas. Today investment is pouring into green energy created from sources such as wind, solar, hydro, biomass and hydrogen.
- Companies in the regulated networks sector invest and operate huge asset networks to move essential supplies of electricity, gas and water across countries and to households and businesses. These businesses are regulated and are allowed to earn fair – but not excessive – returns on the money they invest with large chunks of their revenues and profits linked to inflation.
Our shortlists are based on the highest conviction holdings of some of the world’s best investment managers. The winners will be announced at a gala event in London on 21 June.
Independent power producers
Source: FactSet. PE = price-earnings ratio. PE and dividend yield based on 12-month forecasts
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The common theme in the IPP sector is the heavy investment in renewable energy projects aimed at decarbonising economies and increasing energy security.
EDP Renováveis (PT:EDPR), is a spin-off from Portuguese utility company Energias de Portugal. It is one of the biggest renewable energy companies in the world. It builds and operates wind and solar power plants in Europe, North America and Brazil.
Like many of its sector peers, it is spending huge amounts of money which will see significant growth in the size of its business. It is investing €25bn out to 2027 with the aim of having 50 gigawatts (GW) of installed capacity by 2030.
The company is a leading advocate of asset rotation in the renewables industry. It intends to eventually sell around 30 per cent of its projects to cash in on the value created and reinvest the proceeds in new projects.
Read more: Top investors flock to high growth AAA-rated renewables pure play
Danish company Ørsted (DK:ORSTED) is the world’s biggest offshore wind power company. It currently has an installed capacity of just over 15 GW. After a difficult few years, the company is trying to get back on the front foot.
It is investing DK 475bn (€64bn) in order to achieve an installed wind capacity of 50 GW by 2030. The company is confident that this will double its EBITDA compared with 2022. Importantly, it believes that the spending will create meaningful additional value for its shareholders by targeting an overall return on capital employed of 14 per cent, up from its previous target of 12 per cent.
Read more: Reformed polluter Orsted taps breakneck renewables growth
For many years, Drax (GB:DRX) was the UK’s biggest coal-fired power plant which produced 7 per cent of the UK’s electricity. Now, its days of burning coal are gone. It is now a renewable energy company with four biomass plants as well as pumped storage and hydroelectricity assets.
The company is also targeting carbon removal projects in both the UK and US.
German company Verbio (DE:VBK) is a world leader in the production and distribution of biofuel. It takes local raw materials and waste products such as cooking oils and straw and turns them into biodiesel, bioethanol and biomethane.
Most of its products are aimed at the transportation sector to replace the use of petrol and diesel where Verbio’s biofuels can reduce carbon dioxide emissions by 90 per cent. The company has a network of biofuel filling stations in Germany.
When making biofuels, by-products are produced which are sold for animal feeds as well as raw materials for the foodstuff, cosmetic and pharmaceutical industries.
Acciona Energía (ES:ANE) has been in the renewable energy business for more than 30 years. It currently has 12 GW of installed capacity of wind, solar and hydroelectric plants. The majority of these are in Spain with around 5GW across North America, Australia and Latin America. The company is looking to invest more in the US and Asia.
Regulated networks
Source: FactSet. PE = price-earnings ratio. PE and dividend yield based on 12-month forecasts
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The common theme in this segment is the investment in networks to move electricity, gas and water from where it is produced and stored to households and businesses.
The growth in renewable energy and the increasing use of electric vehicles and heating technology requires more investment in energy grid networks. Meanwhile, problems such as increasing water scarcity and environmental pollution is fuelling investment in water and sewerage networks. Some companies in this sector own IPPs and regulated networks.
Iberdrola (ES:IBE) is one of the biggest utilities in the world. It is an integrated utility with an IPP and network businesses. Its regulated networks are based in the US, UK, Spain and Brazil with a regulated asset base (RAB) – the money invested which it can earn profits from – of €39bn at the end of 2022.
It has wind, hydroelectric and solar power plants as well as battery and hydro storage assets. These totalled 40 GW at the end of 2022.
The company is spending €47bn between 2022 and 2025 which will take its networks RAB to €56bn and installed capacity to 52 GW. A further €65-75bn of investment is expected between 2025 and 2030 with over a 100 GW of installed renewables capacity possible.
These investments are expected to deliver a sustained period of strong profit growth for Iberdrola shareholders.
Read more: Iberdrola’s clean, green dividend dream
UK company SSE (GB:SSE) is a very similar company to Iberdrola both in terms of its businesses – networks and renewable energy – and its growth strategy.
The company is targeting up to £40bn of new investments over the next decade and has slashed its dividend payout in order to fund some of this.
SSE has around 4 GW in offshore and onshore wind farms and hydroelectric power plants. The aim is to increase this to 8GW by 2026 and by more than 13GW by 2031. It is also investing in its energy networks to grow the value of its RAB.
The company is confident that its investment can deliver annual adjusted earnings per share (EPS) growth of 13-16 per cent between 2023-27 and annual dividend growth of 5-10 per cent.
UK water utility United Utilities (GB:UU) has not been having an easy time. It has been plagued by water quality issues and has had to cope with rising operating costs. It has done a good job in reducing the amount of water leakages from its networks.
Its main asset is the water and sewage network in the north west of England. Its RAB and revenues are linked to inflation which should see its dividend per share increase at least in line with the UK retail prices index out to 2025.
Italian utility giant Enel (IT:ENEL) is a big integrated utility with businesses in power generation, energy grids and energy supply. Its size has become a problem for the company in recent years and it is now in the process of slimming down. It is expected to make €21bn of asset disposals by 2025 and will concentrate on core markets such as Italy, Spain, Brazil, Chile and Columbia.
Enel is also investing lots of money in renewable energy projects and is expected to add 21GW of additional renewable capacity in the coming years.
Telecom Plus (GB:TEP) is an outlier in this sector as it does not own any power stations or utility networks. Trading as Utility Warehouse, it partners with suppliers in gas and electricity supply, broadband and mobile phone providers and insurance companies to offer its customers savings by having a single bill.
It also offers a cashback card which can generate big savings on customer’s monthly bills when they shop at selected retailers.
It does not advertise and relies on a network of partners to sign up new customers in exchange for a slice of commission. It currently has 880,000 customers and wants to add another million over the next five years.
