Shares of utility Xcel Energy (NASDAQ:XEL) rose an impressive 13.5% in March, according to data from S&P Global Market Intelligence. That was a full four percentage points more than the average utility stock gained, using the sector-tracking Vanguard Utilities ETF as a proxy. In other words, during a good month for utility stocks, Xcel did even better than most.
The big picture here is mostly about the world learning to deal with the novel coronavirus. The vaccines rolling out around the country are a big piece of the puzzle, with investors expecting the effort to lead to a material economic rebound. That will be driven by people heading back to their workplaces, and businesses — from restaurants to retail stores — more fully reopening their operations. In turn, that should lead to increased demand for electricity, which will be good for the utility industry.
But Xcel’s stock outperformed its peers in March. A piece of that is likely tied to the company’s increasing shift toward clean energy, which puts it squarely into the hot renewable power space. Around 50% of its energy comes from coal and natural gas today, with the remainder derived from renewables and nuclear power. By 2025, however, it expects that balance will have tilted in favor of low-carbon options, with coal and natural gas accounting for less than 40% of the mix. By 2030, less than a decade from now, low-carbon power sources are projected to be producing about 75% of its total electricity output. The spending on this transition will help Xcel justify its requests to regulators for permission to hike its rates. All in all, that’s a compelling story that investors appear to be rewarding.
At Xcel Energy’s current share price, its dividend yields around 2.6%. That’s a bit low — the average utility’s yield is around 3.4%. So the market is clearly affording Xcel a premium share price here. That doesn’t make it a bad company, but long-term investors might want to consider its valuation before jumping in.
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