In this article, we will take a look at the 11 most undervalued utility stocks to buy according to hedge funds. To skip our analysis of the recent market trends and activity, you can go directly to see the 5 Most Undervalued Utility Stocks to Buy According to Hedge Funds.
The utility sector includes companies that provide basic everyday utility services including electricity, natural gas, water, steam, and waste management, among others. As suggested by the components of the sector, it plays an important role in the residential and commercial endeavors of individuals as well as businesses. A disruption to either of these services can result in significant discomfort or even losses which raises the need for constant improvement.
Companies that provide utility services, especially in the United States, typically have relatively stable cash flows and long history of operational excellence. Most of the companies that have made it onto our list of most undervalued utility stocks have been in operation for decades and more than a century in some cases. The nature of the business, i.e., the perpetual demand for utilities despite general market conditions, renders these stocks a safe haven for investors looking for stable returns.
Utility sector companies generally have a history of stable dividend payouts to their shareholders. S&P 500 Utilities Index, which includes utility companies that are part of the S&P 500 Index, is a good indicator of the overall utility sector. As of October 31, the Utilities index had a dividend yield of 3.69% compared to a 1.7% dividend yield for the broader S&P 500 index. In addition, the utilities index had a positive return in the past 5 calendar years, compared to negative returns for the S&P 500 index in 2018 and 2022. Even though it has had more stable returns, the utilities index generated a total return of 8.05% compared to an 11.18% return for the broader index.
With the exception of Altus Power, Inc. (NYSE:AMPS), all the stocks on our list have a history of paying a portion of their income to shareholders in the form of dividends. In terms of dividend yields, Hawaiian Electric Industries, Inc. (NYSE:HE), ALLETE, Inc. (NYSE:ALE), and Black Hills Corporation (NYSE:BKH) rank the highest on our list, respectively, based on the share prices on November 22.
The utility sector, especially the electric power providers, are shifting their focus towards renewable energy and other measures in a bid to move towards carbon neutrality. A prime example is Public Service Enterprise Group Incorporated (NYSE:PEG), the largest company on our list on the basis of market capitalization. The company, in line with President Biden’s goal of decarbonizing the U.S. electric sector by 2035, is working on decarbonizing its businesses. As part of the plan, it intends to direct half of its 2021-2025 capital spending program, which amounts to $14-$16 billion, toward decarbonization, emission reduction, methane reduction, clean energy transition and climate/storm adaptation.
A row of utility poles and power lines, showing the reach of the electric utility operations.
Methodology
To compile our list of the most undervalued utility stocks to buy according to hedge funds, we first made a list of utility stocks with a price to trailing earnings ratio of less than 15. Then, the number of hedge funds that had bought their shares as of September 2023 was determined through Insider Monkey’s database of 910 hedge funds. Out of these, the stocks with the most hedge fund investors were selected. The stocks on our list have been ranked in an ascending order of hedge fund ownership.
Most Undervalued Utility Stocks to Buy According to Hedge Funds
Tulsa, Oklahoma-based ONE Gas, Inc. (NYSE:OGS) provides natural gas distribution services to more than 2.2 million customers in Kansas, Oklahoma, and Texas. It serves residential, commercial, industrial, transportation and wholesale customers in all three states.
On October 30, ONE Gas, Inc. (NYSE:OGS) released its financial results for Q3 2023. Its total revenue declined by 7% y-o-y to $336 million, while it reported a net income of $25 million. It generated a normalized EPS of $0.45 for the quarter, $0.03 more than the consensus estimates.
ONE Gas, Inc. (NYSE:OGS) has regularly paid dividends and has annually increased the dividend payouts every year since 2014. In October, the company declared its latest quarterly dividend of $0.65 per share. Based on the share price on November 22, the company had a dividend yield of 4.38%.
As of Q3 2023, 16 of the 910 hedge funds tracked by Insider Monkey held ONE Gas, Inc. (NYSE:OGS) shares valued at a combined total of $93 million. Cliff Asness’ AQR Capital Management held the highest number of shares among hedge funds with ownership of 0.32 million shares valued at $22 million.
Wall Township, New Jersey-based New Jersey Resources Corporation (NYSE:NJR) is a leading utility company that provides natural gas and clean energy services, including transportation, distribution, asset management and home services.
On November 21, New Jersey Resources Corporation (NYSE:NJR) released its financial results for the three months ended September 30, 2023. It generated total operating revenues of $331 million and a net income of $37 million. It generated a normalized EPS of $0.30 for the quarter which missed the consensus estimate by $0.05.
New Jersey Resources Corporation (NYSE:NJR) has regularly paid dividends for several decades including more than 25 consecutive years of annual dividend increases. The company recently increased annual dividend by 7.7% to $1.68 per share which represents a dividend yield of 3.95% based on the share price on November 21.
Like other stocks such as Vistra Corp. (NYSE:VST), Entergy Corporation (NYSE:ETR), and Consolidated Edison, Inc. (NYSE:ED), the shares of New Jersey Resources Corporation (NYSE:NJR) are among the most undervalued utility stocks to buy according to hedge funds.
Stamford, Connecticut-based Altus Power, Inc. (NYSE:AMPS) is a leading commercial-scale provider of clean electric power to commercial, industrial, public sector and Community Solar customers. It originates, develops, owns, and operates locally sited solar generation, energy storage and charging infrastructure across the nation.
In recent months, Altus Power, Inc. (NYSE:AMPS) executed agreement to acquire 121 MW of solar assets for $120.4 million which expands the company’s presence in North and South Carolina and brings total installed portfolio to nearly 721 MW. The company expects completion of construction for new assets with 75 MW capacity by end of 2023.
On November 13, Altus Power, Inc. (NYSE:AMPS) announced the closing of its Blackstone Construction Facility designed for the construction of commercial solar assets. It includes capacity of $200 million to fund costs.
Based in Calgary, Alberta, TransAlta Corporation (NYSE:TAC) owns, operates, and develops a diverse fleet of electrical generation assets in Canada, the United States, and Australia. With a history of more than 110 years, it is one of Canada’s largest producers of wind power and Alberta’s largest producer of hydro-electric power.
On November 21, TransAlta Corporation (NYSE:TAC) released its updated strategic growth targets to 2028. The growth targets include adding up to 1.75 GW of new capacity to the Company’s fleet by investing C$3.5 billion to develop, construct, or acquire new assets by the end of 2028. It also includes efforts to bring the company’s development pipeline to 10 GW by 2028.
Earlier in November, TransAlta Corporation (NYSE:TAC) announced an agreement to acquire Heartland Generation from Energy Capital Partners for C$658 million. The acquisition is going to add 1,844 MW of complementary flexible capacity to the company’s portfolio.
In addition to updated growth targets, the Board of Directors of TransAlta Corporation (NYSE:TAC) also approved a 9% increase in the regular quarterly dividend which brings the annualized dividend payout to C$0.24 per share. This marks the fifth consecutive annual dividend increase by the company.
Duluth, Minnesota-based ALLETE, Inc. (NYSE:ALE) is a provider of competitively priced energy in the Upper Midwest and invests in transmission infrastructure and other energy-centric businesses. Other businesses include ALLETE Clean Energy, a developer of clean and renewable energy projects, among others.
On November 2, ALLETE, Inc. (NYSE:ALE) released the financial results for Q3 2023. Its revenues declined by 2% y-o-y to $379 million, while its net income surged by 155% y-o-y to $86 million. The normalized EPS was recorded at $1.49 for the quarter, which exceeded consensus estimates by $0.84.
On October 27, the Board of Directors of ALLETE, Inc. (NYSE:ALE) declared a quarterly cash dividend of $0.6775 per share which translates to an annual dividend of $2.71. On our list of 11 most undervalued utility stocks to buy according to hedge funds, ALLETE, Inc. (NYSE:ALE) has the second highest dividend yield at 4.92%.
Like other stocks such as Vistra Corp. (NYSE:VST), Entergy Corporation (NYSE:ETR), and Consolidated Edison, Inc. (NYSE:ED), the shares of ALLETE, Inc. (NYSE:ALE) are among the most undervalued utility stocks to buy according to hedge funds.
6. Public Service Enterprise Group Incorporated (NYSE:PEG)
Latest P/E Ratio:11.52
Number of Hedge Fund Holders: 20
Public Service Enterprise Group Incorporated (NYSE:PEG) is a diversified energy company based in Newark, New Jersey. Established in 1903, it serves 2.3 million electric customers and 1.9 million gas customers in New Jersey and operates the electric transmission and distribution system of the Long Island Power Authority, with 1.1 million customers.
In August, Public Service Enterprise Group Incorporated (NYSE:PEG) announced the sale of its 50% interest in Kalaeloa Partners, L.P. cogeneration facility in Hawaii to Harbert Infrastructure Fund VI, LP. This marked the complete divestiture of the company’s fossil generating fleet. Post-transaction, its generating portfolio comprises 3,760 MW of five carbon-free, base load nuclear units.
Public Service Enterprise Group Incorporated (NYSE:PEG) has a history of more than 115 years of regular dividend payments. Out of the last 20 years, the company has increased its dividend payouts in 19 years. It currently pays a quarterly regular dividend of $0.57 per share which represents a dividend yield of 3.53%.
As of Q3 2023, Public Service Enterprise Group Incorporated (NYSE:PEG) shares were held by 20 out of 910 hedge funds tracked by Insider Monkey with a total value of $95 million. Its largest shareholder was Israel Englander’s Millennium Management with ownership of 0.6 million shares valued at $34 million.
