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Executive Summary

For Big Utility Stock Returns Look to Infrastructure and M&A

By Roger S. Conrad on Apr. 12, 2021

$274 billion: That’s the staggering sum President Biden’s infrastructure plan would allocate to US utilities, as investment in new transmission lines, renewable energy deployment and electrification of transportation.

Bloomberg Intelligence estimates that’s enough to add at least 2 percentage points to utility earnings growth rates. Getting that into rate base would require the assent of Congress as well as state regulators. But even $100 billion of fresh tax incentives and other subsidy would provide a huge lift for earnings and dividends, and ultimately share prices.

The good news on infrastructure is almost certainly one reason the S&P 500 Utilities are up about 12 percent from February lows. But with the sector index still lagging the S&P 500 by more than 2-to-1 year-to-date, it’s clear most investors are treating this as a show-me story. Utility stocks will be rewarded only if it becomes reality.

That’s fair. The silver lining is investors still have time to build positions in the best-positioned companies. And as I’ve said before, utilities’ energy transition opportunities are immense, even without additional federal largesse.

The Biden Administration, for example, is already moving quickly to unlock a 42-gigawatt capacity opportunity in offshore wind just by streamlining regulations for new projects. First to benefit will be Conservative Holding Avangrid Inc (NYSE: AGR), with its Vineyard project on track for final approval this month. And Conservative Focus stock Edison International (NYSE: EIX) is already rolling out a massive electric vehicle charging station initiative in California.

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