Utility companies are often considered uninteresting by many investors. However, in volatile times, utility stocks can be a safe haven for consistent income generation. Electricity generation, water, sewage, and natural gas are some of the essential services that are delivered by utility companies.
The stable demand for these services has led these companies to generate consistent earnings across business cycles.
Some of the best utility investments tare those with robust financials and growth prospects. Investors need to pick companies that offer a combination of stock price appreciation as well as a dividend yield.
One of the companies that fit the bill is AES Corp (NYSE: AES). It is a large-cap stock with a market capitalization of $12 billion. The company is located in Virginia and has operations across Asia, Europe, and South America.
It is one of the most diversified utility companies and generates electricity through natural gas, biomass, hydroelectric, coal as well as biomass and wind. AES is also involved in the distribution of electricity.
Upbeat Q2 results and focus on renewables are the growth drivers
AES surged 16.5% in August on the back of strong financial results and after reiterating its guidance for 2020 even amid the pandemic. For the second quarter, the company posted better-than-expected adjusted earnings per share. However, on a GAAP basis, the AES saw a loss due to a one-time impairment charge.
The company has turned its focus on electricity generation through clean and renewable sources. AES is moving away from the usage of coal to lessen the carbon footprint. The company aims to lower coal-powered generation to 30% by the end of this year and to just 10% by the end of 2030.
In a quest to strengthen its renewable energy business, the company has also acquired an 18.5% stake in AES Tiete in Brazil. The company’s total ownership in this subsidiary stands at 43% right now.
In Q2, AES added 852 megawatts to its renewable energy portfolio. With the right government policies and financial support, the renewable energy sector is likely to see immense growth in the upcoming decade. It is one of the most rapidly growing energy sources in the U.S.
According to the International Energy Agency, the global electricity-generation based on renewables will climb to 45% by 2020. Wind, hydropower, and solar are likely to fuel this growth.
Consistent dividend payout with past growth record
Utility companies are a dependable source of income due to their history of consistent dividend payouts. AES has a dividend yield of nearly 3.3% currently and the company targets dividend growth in the range of 4% to 6% annually.
The utility major has raised its dividend payout five times in the past and presently its payout stands at 42% giving it enough room to increase these payments going forward.
However, a rise in dividends will not be possible unless there is a growth in the company’s earnings. AES forecasts its adjusted EPS to grow at an average annual rate of between 7% and 9% through 2022. With its unwavering focus on reducing coal dependency and building a strong renewable energy portfolio, AES is on track to deliver profits in the future.
Attractive option with a strong dividend yield
Based on the sheer growth of the renewable energy sector, the companies operating in this space will be a direct beneficiary. To reap maximum benefits, investors must focus on clean energy companies that have strong balance sheets.
Top Wall Street analysts are also bullish on AES. Daniel Ford, a UBS analyst has increased his price target on the stock to $20 with a Buy rating on it., indicating upside potential of 15% after accounting for dividend yields.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
