Sarah Travers
Utility stocks are often seen as reliable performers, providing consistent earnings and dividend growth, albeit with modest returns. This pattern persisted in the first half of the year, with utility stocks tracked by the Utilities Sector SPDR ETF posting a 7.6% gain and a 9.3% total return when accounting for dividend income. However, these figures were overshadowed by the S&P 500’s remarkable 14.5% gain and 15.3% total return during the same period.
Despite this steady trend, Constellation Energy stood out significantly. The leading nuclear energy producer saw its shares soar by over 70% in the first half of the year, thanks to several crucial factors that set it apart from its competitors.
Accelerating Growth and Strategic Moves
Constellation Energy’s growth trajectory became clear when it announced its financial outlook for 2024 and beyond in late February. A major player in clean energy, the company anticipates at least 10% annual growth in base earnings through the decade’s end. This aggressive growth plan is bolstered by a robust dividend strategy, with a 25% increase this year, well above its 10% annual growth target. Additionally, Constellation Energy has initiated a $1 billion share repurchase program, further indicating its confidence in sustained growth.
This strategy positions Constellation Energy for rapid and prolonged growth compared to its utility sector peers. For instance, NextEra Energy, another leading clean energy-focused utility, expects to grow its adjusted earnings by 6% to 8% annually through 2027 while increasing its dividend by about 10% per year through at least 2026. This forecast is among the best in the sector, as many other utilities project 5% to 7% annual earnings growth with matching dividend increases.
The AI Data Center Factor
Another key driver of Constellation Energy’s outstanding performance is the increasing expectation that nuclear energy will be essential in powering data centers related to artificial intelligence (AI). These centers consume significantly more power than traditional ones, which are already highly energy-intensive. Constellation Energy is actively pursuing power purchase agreements with major technology firms to support its nuclear facilities, potentially boosting its already strong growth outlook.
A Premium Valuation with Considerations
The enthusiasm around Constellation Energy’s future has pushed its stock to high levels, with a forward price-to-earnings (P/E) ratio of 26 times. This valuation is notably higher than its utility sector peers and even the S&P 500’s nearly 23 times forward P/E. While not as high as the growth-focused Nasdaq-100, which trades at almost 29 times forward P/E, Constellation Energy’s valuation reflects its superior growth potential.
Constellation Energy deserves a premium valuation due to its faster growth rate compared to its utility peers and many other companies. However, this high valuation comes with trade-offs. Its forward P/E in the mid-20s is similar to where NextEra Energy traded a few years ago. Although not a bargain, it is not excessively expensive, especially for a company growing at an above-average rate.
Yet, this high valuation leads to a low dividend yield, recently around 0.7%. This yield is well below the S&P 500’s dividend yield of 1.3% and other utility sector peers like NextEra Energy, which offers a 2.8% yield, with some utilities providing even higher yields. Constellation Energy’s low dividend payout ratio allows it to reinvest more in growth and return additional money to investors through share repurchases.
Prospects for Strong Growth
Constellation Energy is poised to deliver double-digit earnings growth through the end of the decade, significantly outpacing its peers in the utility sector. This strong growth outlook has driven investors to bid up its stock, resulting in a premium valuation compared to its rivals and the broader market. The company has the potential to continue outperforming, particularly if it leverages AI-related growth opportunities. Therefore, Constellation Energy remains an attractive option for growth-focused investors.
However, for those seeking income and lower volatility, the high valuation and low dividend yield might make Constellation Energy less appealing compared to other utility stocks. Investors need to balance the potential for high-powered growth against the need for stable income and lower risk when considering an investment in Constellation Energy.
