• 3 minutes e-car sales collapse
  • 6 minutes America Is Exceptional in Its Political Divide
  • 11 minutes Perovskites, a ‘dirt cheap’ alternative to silicon, just got a lot more efficient
  • 3 days How Far Have We Really Gotten With Alternative Energy
  • 2 hours The United States produced more crude oil than any nation, at any time.
  • 22 hours China deletes leaked stats showing plunging birth rate for 2023
  • 4 hours The European Union is exceptional in its political divide. Examples are apparent in Hungary, Slovakia, Sweden, Netherlands, Belarus, Ireland, etc.
  • 5 days Bad news for e-cars keeps coming
From Fantasy to Fact: The EV Slowdown Gets Real

From Fantasy to Fact: The EV Slowdown Gets Real

Despite significant efforts and investments,…

Debate Rages Over Global Oil Demand

Debate Rages Over Global Oil Demand

Easing inflation has boosted bullish…

Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

More Info

Premium Content

Say Goodbye to Utility Stock Dividends

  • The U.S. electric utility sector is transitioning from slow-growth to growth stocks due to increasing energy demands from data centers and electrification of transport and home heating.
  • Utilities may shift investments back to local, regulated growth opportunities, potentially reducing dividends to fund significant capital expenditures.
  • Investors may be spooked by dividend cuts and abandon utility stocks, even if dividend cuts are not necessarily bad news.
Say Goodbye to Utility Stock Dividends

U.S. electric utility stocks have been in the new part of two emerging trends, the development of data centers with large energy consumption needs as well as the broader electrification trend. Prices have rallied as equity analysts and investors alike seem to agree that electric utilities are becoming growth stocks. This is due to the electrification movement occurring in various sectors of the economy like vehicular transportation and home heating. We first wrote about the prospect of a revival of sales growth for Oilprice.com about fifteen months ago so we suspect our readers are not completely surprised by this news. What accounts for this new belief that the tortoise has turned into a hare?

Consider, first, that an entire generation of utility stock investors has never seen the words “electric utilities” and “growth” used in the same sentence before. Starting about thirty years ago, kilowatt-hour sales growth for US electrics began leveling off to half that of the broader economy. So a 3% rate of overall economic growth translated into a modest 1-2% rate of sales growth in electricity. Not great from an equity investor’s point of view but adequate for a modest level of earnings and dividend growth. The industry grew in part by additional investments in the local utility rate base as well as aggressively expanding non-regulated renewable ventures outside of the service area. Florida-based Nextera’s non-regulated renewables business, Nextera Energy Resources, which owns about 25,000 megawatts across 38 states and Canada, is one such example. But what now? Does it still make sense to invest elsewhere when safer, rate-based regulated growth opportunities closer to home are now evident? We think these utility-financed, non-regulated ventures will be the first casualty of the new sales growth era for a simple reason. It is safer and probably more lucrative to invest in the local utility. Plus the local state utility regulators tend to be more generous from an investor standpoint. This is an old and fairly straightforward instance of utility capital allocation decisions. When local investment opportunities are skimpy, diversify into other businesses or service areas. When local investment opportunities reappear, new investment capital comes home so to speak. And this time the local opportunities are much, much bigger so this investment shift should be even more dramatic.

Related: Europe's Shift from Russian Gas to Pricey LNG

But this isn’t the only major capital reallocation decision we expect nor the most dramatic. As demand for new power generation and related distribution facilities increases rapidly, utility cash resources will become strained. The result? The industry’s generous level of stock dividends may soon become a thing of the past. Stated simply, investors relying on utility stocks for income will have to look elsewhere to satisfy their financial requirements. (National Grid, the US-UK giant, just cut its dividend to help finance a huge capital program.) Is this a bad thing? From an investment point of view, not at all. A utility stock with a 3% earnings growth rate and a 4% current yield has an annual implied total equity return of 7%. Which pretty much sums up the status quo. However, if accelerating kilowatt-hour sales growth sharply boosts earnings per share (EPS) growth to 10%, say,  the implied total equity return is now a much higher 10% even without the stock dividend and that should translate into a sharp boost to utility stock prices. There are two reasons why these generous utility dividends may be eliminated. First and most obviously the companies will need this cash for growth-related capital expenditures. Second, if our understanding here is even remotely correct, utilities will no longer need to compensate investors with current income as stock price appreciation should more than compensate them for the absence of income. Growth stocks don’t pay dividends and they don’t have to. Their investors are conditioned to expect their equity returns via stock price appreciation. And when free cash flow resumes management returns cash to their shareholders via stock buybacks.

Will US investors respond negatively when the first utility omits or sharply reduces its common stock dividend as did the shareholders of National Grid? We think it’s quite likely. Many investors mistakenly believe that all dividend cuts are negative. But, assuming utility earnings and sales growth continue to accelerate, that stock sell-off, if it does occur, may create a very attractive buying opportunity.

By Leonard Hyman and William Tilles for Oilprice.com

More Top Reads From Oilprice.com:

Download The Free Oilprice App Today

Back to homepage

Leave a comment
  • George Doolittle on June 11 2024 said:
    I said "goodbye" and the Utilities still pay their Dividends now what?

Leave a comment

EXXON Mobil -0.35
Open57.81 Trading Vol.6.96M Previous Vol.241.7B
BUY 57.15
Sell 57.00
Oilprice - The No. 1 Source for Oil & Energy News