We recently compiled a list of the 10 Best Utility Stocks to Buy Now. In this article, we are going to take a look at where American Water Works Company, Inc. (NYSE:AWK) stands against the other utility stocks. You can also check out the 20 States With the Most Expensive Electricity In The US here.
The power and utilities industry in 2023 saw mixed outcomes. Despite a 53% year-on-year drop in natural gas prices for power generation, customer bills went up by 1.9%. This increase was due to record-breaking investments of nearly $171 billion in grid modernization and decarbonization efforts, along with rising interest rates. Overall, electricity sales dipped slightly by 1.2% year-on-year (YoY).
Looking ahead to 2024, the outlook for clean energy is bright. Forecasts predict stable electricity prices alongside a 2% growth in sales. This growth is fueled by a rise in clean energy investment, from both utility companies and the government. Investments are being directed towards renewable energy generation, with solar expected to double in capacity in 2024.
The U.S. Energy Information Administration (EIA) forecasts a significant year for solar power, with utilities planning a 30% increase in capacity by adding 31 gigawatts. Wind energy is also projected to grow by 5% or 7 gigawatts. As a result, solar and wind power are set to become the dominant sources of electricity generation in the US, potentially surpassing coal. Renewables are expected to reach 18% of total generation, while coal may fall to 17%, marking a historic milestone in the transition to cleaner energy sources.
Moreover, there is a forecast of accelerating demand for electricity in the US in the next few years. According to a report by consulting firm Grid Strategies, electricity demand forecasts for 2024 have been significantly revised upward based on filings submitted to the Federal Energy Regulatory Commission (FERC) in 2023. Grid planners now anticipate a nationwide increase of 4.7% over the next five years, which is a sharp rise from the 2.6% growth projected just last year. This rise in demand is expected to be accompanied by a substantial increase in peak demand, with forecasts indicating a growth of 38 gigawatts (GW) over the next five years.
This increase in electricity demand is driven by multiple factors. Industrial facilities, manufacturing plants, and data centers are experiencing a construction boom, with data centers in some areas like Virginia seeing unprecedented growth at 6% to 8% every year. Electric vehicles are also expected to contribute to the demand increase as BloombergNEF (BNEF) forecasts a 20% YoY increase in global battery electric and plug-in hybrid vehicle sales in 2024.
On the supply side, challenges remain. According to Senior Partner for Energy & Utilities at West Monroe, Danny Freeman, utilities are going to prioritize grid reliability and resilience in response to climate change. Extreme heat and drought are likely to continue disrupting power generation in 2024, with summer 2023’s record-breaking heat likely marking the start of a long-term trend.
The American West is facing its driest period in 1,200 years, and researchers predict a long-term pattern of aridification. These conditions can significantly reduce power output, especially during peak demand periods. Thus, the Department of Energy (DOE) awarded $3.5 billion in October 2023 to projects that will improve grid flexibility and resilience. The funding for this project is provided by the Grid Resilience Program (GRIP), created by the Infrastructure Investment Jobs Act (IIJA).
The rapid transformation of the utilities sector presents many exciting opportunities for investors. With this context in mind, let’s take a look at the 10 best utility stocks to buy now.
Our Methodology
To shortlist the best utility stocks, we relied on Insider Monkey’s database of 920 hedge funds as of Q1 2024 to analyze the hedge fund sentiment for each stock. We picked the utility stocks with the highest number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A technician in a deep-water treatment facility, ensuring clean water for public safety.
American Water Works Company, Inc. (NYSE:AWK)
Number of Hedge Fund Holders: 36
American Water Works Company, Inc. (NYSE:AWK) is a major US water utility company. Established in 1886 and headquartered in Camden, New Jersey, this company delivers water and wastewater services to millions of residents across 14 states.
The company reported solid first-quarter earnings of $0.95 per share as compared to $0.91 in 2023, meeting expectations. American Water Works Company, Inc. (NYSE:AWK) also reaffirmed its full-year EPS guidance of $5.20 to $5.30 per share. American Water Works is progressing well with its $3.1 billion capital investment plan and recently finalized the acquisition of a wastewater treatment plant in Granite City, IL, for $86 million.
Analysts are moderately bullish on American Water Company, Inc. (NYSE:AWK) with a rating of “Moderate Buy.” The average price target for the next 12 months is $134.20, suggesting a potential upside of 2.8%.
Here’s what ClearBridge Investments said about American Water Works Company, Inc. (NYSE:AWK) in its Q3 2023 investor letter:
“At the same time, an out of favor utilities sector created an opening for us to be opportunistic. During the quarter we added American Water Works Company, Inc. (NYSE:AWK), the largest publicly traded water utility in the U.S., operating across 24 states and providing drinking water, wastewater services and other related services to 14 million customers. Continuous investments in infrastructure improvement, resiliency and water quality should drive solid growth and generate attractive regulated returns for the company for the foreseeable future. In addition, the water infrastructure market remains very fragmented, with 80% of community water systems serving a population of 3,000 or less, enabling American Water Works to continue its strategy of accretive acquisitions to bolster its growth rate.”
Overall AWK ranks 8th on our list of the best utility stocks to buy. You can visit 10 Best Utility Stocks to Buy Now to see the other utility stocks that are on hedge funds’ radar. While we acknowledge the potential of AWK as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AWK but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These 10 Stocks in June.
Disclosure: None. This article is originally published at Insider Monkey.
