2023-12-30 00:47:42 ET
Summary
- WEC Energy is an attractive utility stock due to potential interest rate decreases and its history of beating guidance.
- The company has steadily grown its sales and EPS over the last decade, with analyst consensus expecting continued growth.
- WEC Energy offers a strong dividend yield and plans to invest in renewable energy projects, regional development, and environmental sustainability.
Introduction
The utilities sector is attractive, notably WEC Energy ( WEC ). The sector is very likely to enjoy interest rate decreases for two reasons. The first one is that companies in the sector tend to be leveraged, and it will lower their interest expenses. Moreover, it will also be beneficial as companies in the sector are often used for income streams. With lower rates, investors may once again flock to utility stocks.
WEC Energy is one of my favorite companies in the sector. It has a long growth history, and the company has an excellent execution record. It has beaten the guidance every year over the last two decades. Therefore, I believe it is an interesting prospect to revisit. If attractive, I may buy more shares to increase my dividend income.
Seeking Alpha's company overview shows that:
WEC Energy Group provides regulated natural gas, electricity, and renewable and nonregulated renewable energy services in the United States. The company operates through six segments: Wisconsin, Illinois, Other States, Electric Transmission, Non-Utility Energy Infrastructure, and Corporate and Other. It generates and distributes electricity from coal, natural gas, and oil and hydroelectric, wind, solar, and biomass sources.
Fundamentals
The revenues of WEC Energy have more than doubled over the last decade. The company is steadily growing its sales by selling more energy and increasing prices as it invests more in its gas and electricity network. In 2015, the company also enjoyed an increase in sales due to the acquisition of Integrys, which increased the number of customers and markets it serves. In the future, as seen on Seeking Alpha, the analyst consensus expects WEC Energy to keep growing sales at an annual rate of ~ 1 % in the medium term.
The EPS (earnings per share) of WEC Energy has increased by 73% over the last decade. The growth rate is slower than the sales growth because of the significant increase in the number of shares due to the Integrys purchase. However, a combination of higher sales and improved margins due to realized synergies have made the acquisition attractive to the EPS. In the future, as seen on Seeking Alpha, the analyst consensus expects WEC Energy to keep growing EPS at an annual rate of ~ 6 % in the medium term.
The dividend is probably the leading reason to buy an utility stock. The company has just increased the dividend by 7.1% for 2024. It marks the 20th annual increase in a row. Therefore, the company is getting closer to becoming a dividend aristocrat. With the current increase, the dividend yield will be close to 4%, which is attractive when looking at the U.S. treasuries. The company pays 70% of its EPS as dividends, and while it may look high, it makes sense as it is a regulated monopoly with little competition. Investors should expect future dividend increases to align with the EPS increase.
In addition to dividends, companies tend to return capital to shareholders via buybacks. These share repurchase plans support EPS growth as they decrease the number of outstanding shares. Over the last decade, the number of shares increased by almost 40%, diluting shareholders significantly. However, this resulted from the Integrys acquisition, which was accretive to the EPS despite the dilution. Since then, the number of shares has been stable. Going forward, we will likely see some share issuance as the company plans to fund $2B of its growth plans with stocks.
Valuation
The P/E (price to earnings) ratio of WEC Energy stands at 18.2 when using the 2023 EPS estimates. Since 2023 is almost over, I will also look at 2024. The current P/E ratio is 17. The current valuation is nearly the lowest we have seen over the last twelve months despite the Federal Reserve's preparing to increase rates. Considering the 6% growth rate and safety of a regulated utility, I believe the current valuation is fair for income investors.
The graph below from Fast Graphs also emphasizes that the shares of WEC Energy are fairly valued. The average P/E ratio of the company stands at 18 over the last two decades. This is in line with the current P/E ratio of 17.2 for 2024. The future growth rate is 6% from 2024 onwards, almost the same as the 7% average growth rate. I believe the current valuation is fair because WEC Energy tends to outperform its guidance. For the first time in several years, investors can acquire shares of WEC Energy around its average valuation.
Opportunities
The most prominent opportunity is the expansion of renewable energy projects. WEC Energy is seizing a substantial growth opportunity by investing $23.4 billion in its ESG progress plan for 2024 through 2028. This plan involves a significant commitment to new solar and wind projects, allowing the company to shut down its coal plants in 2031. It includes battery storage projects, modern and efficient natural gas generation, and LNG storage. The company aims to increase its renewable capacity by 3,800 megawatts, demonstrating a clear focus on sustainability and clean energy. The investment plan anticipates an average asset base growth rate of 8.1% per year over the next five years, contributing to a CAGR (compound annual growth rate) of 6.5% to 7% in earnings per share .
" In our new five-year plan, we expect our asset base to grow at an average rate of 8.1% annually. As we fund this growth with an appropriate financing package, we project our earnings per share will continue to rise at a compound annual rate of 6.5% to 7% a year ."
(Gale Klappa, Executive Chairman, Q3 2023 conference call)
Another opportunity is regional development, with new companies increasing demand for low-carbon energy. WEC Energy is capitalizing on the economic growth in the Milwaukee region, particularly in the I-94 corridor between Milwaukee and the Illinois state line. This growth is attributed to various industries, including data centers, pharmaceuticals, solar panel components, and distribution centers. The company's investments align with the expanding commercial and residential development in the region, anticipating an average annual asset base growth of 8.1%. The strong regional economy, highlighted by a low unemployment rate of 3.1%, presents a growth opportunity for WEC Energy, allowing it to build specific low-carbon plants for clients who wish to become carbon-neutral.
" The economic growth we're seeing in the Milwaukee region, particularly in what we call the I-94 corridor in the southeastern part of the state, is driving our investment. From data centers to pharmaceuticals, micro inverters for solar panels, to even more gummy bears to massive new distribution and fulfillment centers ."
(Gale Klappa, Executive Chairman, Q3 2023 conference call)
Another opportunity is the commitment to environmental sustainability, likely leading to price increases. WEC Energy is committed to reducing carbon dioxide emissions, aiming for an 80% reduction from its power generation fleet by the end of 2030. The focus on environmental sustainability includes significant investments aligning with the evolving regulatory landscape. This commitment to sustainability is likely to be very expensive, and the states who wish for cleaner air and sustainable electricity will have to allow for price increases to fund the investments.
" In the plan, for example, we're making a significant commitment to new solar, wind, and battery storage, as well as modern, efficient natural gas generation and LNG storage ."
(Gale Klappa, Executive Chairman, Q3 2023 conference call)
Risks
The regulatory risk is the most prominent, as the company handles regulatory approvals and rate decisions. WEC Energy faces the risk associated with regulatory decisions, particularly in Wisconsin and Illinois. While progress has been made with rate reviews in Minnesota and Michigan, pending decisions in Wisconsin and Illinois could impact the company's financial performance. In Illinois, an administrative law judge's proposed order recommends a 9.83% return on equity. Final decisions are expected by the end of November. Regulatory uncertainties could affect the company's ability to execute its investment plans and achieve targeted returns . A negative investment will hurt the EPS growth and may limit future growth projects.
" We expect a decision from the Wisconsin Commission before the end of the year on our limited reopener filings. We also have an update on our rate filings under review in Illinois for Peoples Gas and North Shore Gas ."
(Scott Lauber, President and Chief Executive Officer, Q3 2023 conference call)
The second risk is the energy demand. While demographic trends may change and affect demand in the long term, in the short term, demand is affected by the weather. The company acknowledges the impact of weather on its financial performance. Weather-related factors, such as variations in temperature, can influence the demand for energy and affect the company's earnings. While the company takes weather-related considerations in its financial guidance, unexpected or extreme weather conditions can challenge achieving targeted financial outcomes .
" As always, this assumes normal weather through the final quarter of 2023 ."
(Gale Klappa, Executive Chairman, Q3 2023 conference call)
There is also a financial risk due to higher rates and a debt-to-EBITDA ratio of more than 6. Executing WEC Energy's ambitious capital plan, involving investments of $23.4 billion in the ESG progress plan, introduces financial risks. The company plans to fund 65% of its cash needs through cash from operations, 28% from debt, and 7% from common equity issuance. While the company aims to tap into various financing mechanisms, including dividend reinvestment and employee benefit plans, the successful implementation of this financial strategy relies on market conditions, investor sentiment, and the company's ability to secure funding at favorable terms .
" I'll provide details about our anticipated financing activity to support the plan. As you can see on the chart, over the next five years, we expect cash from operations to fund about 65% of our cash needs. About 28% of the funding is expected to come from debt and the remaining 7% from common equity issuance ."
(Xia Liu, Executive Vice President and Chief Financial Officer, Q3 2023 conference call)
Conclusions
To conclude, WEC Energy is a growing blue-chip company that provides electricity and gas to several states. Its diversification allows it to increase sales and EPS over the long run and reward investors with a dividend growing for more than two decades. The company is not cheap, but it trades for what I believe to be a reasonable valuation for a company with little competition and excellent long-term execution.
The company has several growth opportunities around the megatrend of renewables and reducing the carbon footprint. It replaces its old plants, builds new ones for specific clients, and enjoys price increases by closing polluting plants and investing in a resilient network. Despite the risks, I believe that it is clear how necessary the transition is and that the company will enjoy the needed price increases. Therefore, shares of WEC Energy are a BUY.
For further details see:
WEC Energy Is A Long Term Buy