The utility stocks to own in 2024, according to KeyBanc

The utility sector underperformed the broader market for most of 2023 prior to partially rebounding in the fourth quarter. KeyBanc thinks this momentum will be sustained for the foreseeable future. Further, the firm believes the sector is relatively inexpensive, offers an attractive 4% dividend yield and growth, and should benefit from abating inflation, lessening bill pressures and interest rate stability.

KeyBanc’s picks continue to include high-quality utility names with constructive regulation and above average growth rates, such as Xcel Energy (XEL), WEC Energy (WEC), CenterPoint Energy (CNP), DTE Energy (DTE), and CMS Energy (CMS). The firm also likes Duke Energy (DUK), while FirstEnergy (FE) and Entergy (ETR) remain its value picks.

2024 OUTLOOK: KeyBanc believes utility names should sustain the momentum into 2024. The utility sector underperformed the broader market for most of 2023 prior to partially rebounding in the fourth quarter, which the firm will be sustained for the foreseeable future. Further, KeyBanc thinks the sector is relatively inexpensive, offers an attractive 4% dividend yield and growth, and should benefit from abating inflation, lessening bill pressures and interest rate stability.

Additionally, the firm sees regulatory risks moderating in 2024 in most states as PUCs across the U.S. have had time to digest the implications of their adverse rulings on utility companies. Among the “controversial” states of late, KeyBanc believes that Michigan will return to its premium status, Minnesota and Colorado will stabilize at an “average” status, while Illinois and Connecticut are likely to remain unconstructive for the foreseeable future. The firm is cautiously optimistic on the Arizona commission becoming more constructive, even though the upcoming elections present the possibility for another shakeup. It also sees California perception improving due to a recent stream of steady regulatory outcomes there.

The 2024 elections present some risk for the space, but KeyBanc views utility as more insulated compared to some other sectors, primarily due to state-level regulation.

QUALITY NAMES: The firm’s picks continue to include high-quality utility names with constructive regulation and above-average growth rates, such as Xcel Energy, WEC Energy, CenterPoint Energy, DTE Energy, and CMS Energy. KeyBanc also likes Duke Energy, which it thinks has significantly “steadied the ship” following the disposition of non-regulated renewables business and a constructive regulatory outcome in North Carolina. FirstEnergy and Entergy remain its value picks, as the firm believes both names have the potential to close valuation discount with peer average.

RATING CHANGES: KeyBanc downgraded NorthWestern Energy (NWE) to Sector Weight from Overweight without a price target as it sees a lack of near-term catalysts for the shares. There seems to be little enthusiasm among investors for the stock, the firm argues, adding that given the lack of other identifiable catalysts on the horizon, and the potential noise around Montana elections, it is stepping back from the name.

KeyBanc also upgraded Consolidated Edison (ED) to Sector Weight from Underweight without a price target. The company’s “timely disposition” of its non-regulated businesses allowed it to offset its equity needs, the firm argues. With the multi-year rate plan in place and political rhetoric aimed at the utility subsided, KeyBanc sees no immediate negative catalysts on the horizon for the shares.