Goldman Sachs is hosting its 12th annual Power & Utility Conference in New York on Thursday, August 8. The one-day event will focus on a variety of topics surrounding the power & utility business, including capital allocation, growth in a regulatory environment, and demand trends across the power, natural gas, and water markets.
The Select Sector Utilities SPDR is a benchmark for the power & utility industry. The ETF has underperformed the S&P 500 so far in 2013 as investors have placed larger bets on cyclical stocks as the U.S. economy continues its slow-but-steady recovery.
As a long-term investor, I’m more concerned with the 5-year history of utility stocks and pay less attention to the current year performance. Simply put, the utility sector has a consistent history of price appreciation and dividend growth through all market cycles. Power & utility stocks also performed better than the S&P 500 during the 2008-09 recession, and the sector has outperformed the market over the last decade.
Ahead of the Goldman Sachs conference, here are 3 power & utility companies which could deliver over the next 12 months:
Clean energy leader
The Juno Beach, FL headquartered NextEra Energy, Inc. (NYSE:NEE) is a leading clean energy company and the parent of Florida Power & Light and NextEra Energy Resources. The FPL electric utility business serves 4.6 million customers in Florida, making it one of the largest rate-regulated utilities in the U.S. In addition to FPL, NextEra Energy, Inc. (NYSE:NEE) is the largest generator of renewable energy from the wind and sun.
Investors in NextEra Energy, Inc. (NYSE:NEE) have strong visibility for earnings and dividend growth through 2016. Last year, the Florida Public Service Commission approved a rate plan which extends through December 2016. The rate agreement will allow Florida Power & Light to earn a return on equity between 9.70% and 11.70%.
NextEra Energy, Inc. (NYSE:NEE) was also chosen as the winner of a $3 billion gas pipeline running from southwestern Alabama to central Florida, expected to be completed by 2017. Chief executive James Robo will be speaking at the upcoming Goldman conference.
Great Lakes energy company
Wisconsin Energy Corporation (NYSE:WEC) is presenting at the upcoming Goldman conference and is one of the largest holdings in the Utilities SPDR. The Milwaukee, WI headquartered company operates in two segments: a utility energy segment and a non-utility energy segment.
I believe Wisconsin Energy Corporation (NYSE:WEC) can outperform the utility sector over the next 5 years. Back in May, the company held its annual meeting of shareholders where CEO Gale Klappa outlined his growth plan through 2017. Klappa announced the company’s goal to increase its dividend payout to 65–70% of earnings by 2017, a distribution more consistent with other energy companies.
At the time, Klappa anticipated a double-digit increase in Wisconsin Energy Corporation (NYSE:WEC)’s dividend for 2014, followed by a 7–8% growth in the years 2015 through 2017. The announcement follows a 13.3% dividend increase that took place in January 2013, which raised the annual dividend to $1.36 per share.
Fast-forward to July 18, and Wisconsin Energy Corporation (NYSE:WEC) announced the company would accelerate its 2014 dividend action for the second half of 2013. The news comes following the recent opening of the Oak Creek Power Plant, including two new coal-burning units approved by regulators. The completion of the Oak Creek project brings to a close a decade-long project, which will allow Wisconsin Energy Corporation (NYSE:WEC) to return greater cash flow to shareholders.
New York City utility giant
Consolidated Edison, Inc. (NYSE:ED) delivers electricity, natural gas, and steam energy to New York City, the most concentrated population center in the US. In addition to Manhattan, Consolidated Edison, Inc. (NYSE:ED) provides energy within a 1,350 square mile area in southeastern New York state and Westchester County.
Back in May, Consolidated Edison, Inc. (NYSE:ED) reported lower-than-expected earnings of $0.69 due to higher operations & maintenance costs related to Hurricane Sandy. Wall Street had been expecting $0.73 for Q412, and full-year guidance of $3.65-$3.85 is likely lower than expected due to a “drag effect” from Hurricane Sandy as well.
Investors are waiting to see the result of Consolidated Edison, Inc. (NYSE:ED)’s 2013 filing with the New York State Public Service Commission, as the company is hoping to earn an additional $400 million based on higher utility rates. This would provide a return on equity of 10.35%, much higher than Con Edison’s 12-month ROE of 8.99%. I’d consider holding off on Con Ed until a decision in the rate case is announced, as the verdict could affect our long-term thesis.
In June, Citigroup upgraded Consolidated Edison, Inc. (NYSE:ED) to “buy” from “hold” with a new $65 price target. The analysts became optimistic on Con Ed following positive meetings with the company’s executive team.
Consolidated Edison, Inc. (NYSE:ED) is participating in a roundtable at the Goldman Sachs Power & Utility conference. The company is also the 10th largest holding in the Utilities SPDR ETF, representing 3.57% of the index.
Foolish takeaway
While power & utility companies may not be the “sexiest” investments, the fact is that slow & steady companies can deliver healthy returns for your portfolio. Furthermore, one of the most important aspects of an investment is evaluating the downside, and the utility sector has performed well through all market cycles.
Readers might consider NextEra Energy, Inc. (NYSE:NEE) and Wisconsin Energy Corporation (NYSE:WEC) based on relative outperformance and strong long-term fundamentals. A third option is Con Edison, pending a successful rate increase with the New York state regulator.
The article Watch These Stocks at Goldman Sachs Power & Utility Conference originally appeared on Fool.com and is written by John Macris.
John Macris has no position in any stocks mentioned. The Motley Fool recommends Wisconsin Energy. John is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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