6 Most Undervalued Utilities Stocks

It’s been a rough year for utilities stocks, but there’s good news for investors looking for opportunities among these dividend-paying companies: many are deep in undervalued territory.

Among the names trading at discounted prices are Indiana-based regulated gas company NiSource NI and Louisiana-based electric power provider Entergy ETR.

Over the course of 2022, the Morningstar US Utilities Index kept up with the market, even outpacing it at times as investors looking for a safe haven turned to this sector during the bear market. That interest drove valuations on these stocks into expensive territory last summer.

However, the trend has reversed in 2023 as the stock market has recovered. The Morningstar US Utilities Index is down 5.0% so far this year, while the Morningstar US Market Index is up 14.8%. For the last 12 months as of June 20, utilities are up 5.8% while the overall market is up 21.0%.

Despite that difficult first half, Morningstar energy and utilities strategist Travis Miller says the traditional role utilities play as a dividend and defensive haven during difficult economies or markets is being complimented by a new dynamic: the potential for growth.

“Utilities are never going to rival tech or biotech companies in terms of growth,” Miller says. “But this is the best utilities growth environment we’ve seen in decades. When you combine those big macro themes of electrification and clean energy, we’re seeing utilities with growth prospects that we haven’t seen in many, many, many years.”

Morningstar US Utilities Index

Trailing 12-month performance.

What’s In the Morningstar US Utilities Index?

The Morningstar US Utilities Index consists of companies from six different utilities industries: diversified, independent power, regulated electric, regulated gas, regulated water, and renewable. NextEra Energy NEE, Southern SO, and Sempra Energy SRE are among the largest firms in this index.

Screening for Undervalued Utilities Stocks

We screened the Morningstar US Utilities Index for the most undervalued stocks, then narrowed that search to stocks that currently carry a Morningstar Rating of 4 or 5 stars. There are 58 stocks in the index, 36 of which are covered by Morningstar analysts. Of those, 12 were undervalued as of June 23.

The full list of undervalued utilities stocks can be found at the bottom of this article. The following six were the most undervalued 4- and 5-star stocks from our screen.

• NiSource
• Entergy
• Duke Energy DUK
• American Electric Power AEP
• Evergy EVRG
• Dominion Energy D

The most undervalued stock was NiSource, which ended June 22 trading at an 18% discount to its fair value estimate set by Morningstar equity analysts. The least undervalued stock was Dominion, trading at 10% below its fair value estimate of $32.

Top 6 Undervalued Utilities Stocks

Undervalued Utilities Stocks to Buy Now

NiSource

• Industry: Regulated Gas
• Stock Price: $27.15
• Fair Value Estimate: $32.00
• Forward Dividend Yield: 3.68%

“NiSource is one of the nation’s largest natural gas distribution companies, with approximately 3.2 million customers in Indiana, Kentucky, Maryland, Ohio, Pennsylvania, and Virginia. NiSource’s electric utility transmits and distributes electricity in northern Indiana to about 500,000 customers. The regulated electric utility also owns more than 3,000 megawatts of generation capacity, most of which is now coal-fired but is being replaced by natural gas and renewable energy.

“NiSource continues to transition from its roots as a natural gas distribution and midstream company. An increasing focus on electric infrastructure and renewable energy will be a key growth driver in the coming years, creating a more even mix of earnings from its natural gas and electric businesses.

“That growth could extend beyond 2025, based on electric and gas system infrastructure improvement projects NiSource has identified. Replacing steel and cast-iron pipe with plastic at its natural gas distribution utilities is a key initiative along with investments across the business that reduce greenhouse gases. Almost all these investments receive favorable regulatory treatment, enhancing NiSource’s cash flow.”

—Travis Miller, strategist

Entergy

• Industry: Regulated Electric
• Stock Price: $99.18
• Fair Value Estimate: $120.00
• Forward Dividend Yield: 4.32%

“Entergy is a holding company with five regulated integrated utilities that generate and distribute electricity to about 3 million customers in Arkansas, Louisiana, Mississippi, and Texas. It is one of the largest power producers in the country with approximately 23 gigawatts of rate-regulated, utility-owned power generation capacity.

“Entergy’s growing energy-hungry customer base and constructive rate regulation in the Southeastern United States give the company a long runway of earnings and dividend growth potential.

“We expect Entergy to invest $5 billion annually for at least the next five years to upgrade its large grid network and expand its renewable energy portfolio. Industrial customers, which represent about half of Entergy’s customer base, generally support these investments, as they aim to electrify and decarbonize their businesses. We forecast Entergy’s planned growth investments and customer growth will lead to annual earnings growth in line with management’s 6%-8% target.”

—Travis Miller, strategist

Duke Energy

• Industry: Regulated Electric
• Stock Price: $90.90
• Fair Value Estimate: $105.00
• Forward Dividend Yield: 4.42%

“Duke Energy is one of the largest U.S. utilities, with regulated utilities in the Carolinas, Indiana, Florida, Ohio, and Kentucky that deliver electricity to 8.2 million customers. Its natural gas utilities serve more than 1.6 million customers. Duke operates in three major segments: electric utilities and infrastructure, gas utilities and infrastructure, and commercial renewable energy.

“Duke Energy is one of the largest regulated utilities in the United States. Florida is Duke’s most constructive and attractive jurisdiction, with higher-than-average load growth and best-in-class regulation that allows for higher-than-average returns on equity, forward-looking rates, and automatic base-rate adjustments. We expect significant solar growth in the region and storm-hardening investments.

“In North Carolina, Duke’s largest service territory, the outlook has improved significantly. Legislation allows for multiyear rate plans, including rate increases for projected capital investments. Duke has filed rate cases at both state subsidiaries. The legislation also allows for performance incentive mechanisms and usage-decoupled rates for residential customers, protecting utilities from underlying usage trends. Finally, the legislation supports utilities playing a critical role in the state’s clean energy transition. We view the legislation as a significant improvement in the regulatory constructiveness in the state.”

— Andrew Bischof, strategist

American Electric Power

• Industry: Regulated Electric
• Stock Price: $85.10
• Fair Value Estimate: $97.00
• Forward Dividend Yield: 3.90%

“American Electric Power is one of the largest regulated utilities in the United States, providing electricity generation, transmission, and distribution to more than 5 million customers in 11 states. AEP operates numerous utilities, protecting investors from any one adverse regulatory ruling.

“AEP has experienced some regulatory pushback on its more than $2 billion of planned renewable energy projects at Southwestern Electric Power. Texas regulators recently rejected the projects, and Louisiana regulators denied approval of a recent settlement for the projects. Although this is a setback for AEP’s renewable energy ambitions, we think its lengthy backlog of transmission projects will backfill any reduction in renewable generation investment.

“Transmission investment is one of AEP’s most attractive long-term growth opportunities, given federal incentives to improve the efficiency of the U.S. power grid. Moaty transmission and distribution investments account for two-thirds of AEP’s five-year capital investment plan. We believe AEP is one of the best-positioned transmission developers in the United States, given its large transmission footprint and history of execution. We think environmental regulations, aging infrastructure, and renewable energy growth support a long runway of growth at the unit.”

—Andrew Bischof, strategist

Evergy

• Industry: Regulated Electric
• Stock Price: $58.30
• Fair Value Estimate: $65.00
• Forward Dividend Yield: 4.20%

“Evergy is a regulated electric utility serving eastern Kansas and western Missouri. Major operating subsidiaries include Evergy Metro, Evergy Kansas Central, Evergy Missouri West, and Evergy Transmission Co. The utility has a combined rate base of approximately $18 billion, with about half in Kansas and the rest split between Missouri and federal jurisdiction. Evergy is one of the largest wind energy suppliers in the U.S.

“Evergy must secure constructive regulatory outcomes in Missouri and Kansas to support growth plans that include $11 billion of capital investment during the next five years, primarily to replace aging coal plants with renewable energy. Legislation in Missouri should allow Evergy to receive compensation for coal plants it retires; however, regulators control the exact implementation and financial impact. This creates uncertainty for investors as Evergy transitions its generation fleet away from fossil fuels.

“Evergy management said it plans to direct all of Evergy’s growth capital to its regulated utilities at least through 2025. Senior leadership has extensive experience at companies with competitive power businesses, and we wouldn’t be surprised if Evergy directs some capital investment outside of the utilities, perhaps with a partner. We expect the dividend to grow in line with earnings for the foreseeable future.”

—Travis Miller, strategist

Dominion Energy

• Industry: Regulated Electric
• Stock Price: $53.0
• Fair Value Estimate: $59.00
• Forward Dividend Yield: 5.04%

“Dominion is an integrated energy company with over 30 GW of electric generation capacity and more than 90,000 miles of electric transmission and distribution lines. Dominion owns a liquefied natural gas export facility in Maryland and is constructing a rate-regulated 5.2 GW wind farm off the Virginia Beach coast.

“Unlike other offshore wind projects, Dominion’s will be rate-regulated, mitigating investor risk for a project with greater execution risk than onshore renewable energy development. Investors must carefully watch for cost increases at its offshore project. And given the project’s cost relative to alternative generation options, the project has increased political risk for Dominion.

“New Virginia legislation brings changes to the regulatory construct in the state. The legislation brings allowed returns on equity more in line with industry peers for the next two years. The legislation also replaces the triennial review process with traditional base rate cases. The triennial reviews create significant uncertainty because of the risk that Dominion might have to return cash to customers if it earns more than its allowed returns. The legislation only brings clarity for investors for the next two years, after which regulators will have greater control determining Dominion’s returns and investments.”

—Andrew Bischof, strategist

Top 12 Undervalued Utilities Stocks