Source: Andrii Yalanskyi / Shutterstock
Utilities that generate the electricity we need in our daily lives are necessary. Whether the electricity is developed from traditional methods of burning fossil fuels or renewable sources such as wind, water, and sunlight, utilities serve a critically important purpose in communities around the world.
But this does not mean that utilities make good investments. In fact, utility stocks have been some of the worst investments of the past few years. Many utility companies are experiencing challenges as they try to transition to renewable forms of electricity generation, struggling with high costs, regulatory red tape, and shareholders’ impatience.
As a result, the stocks of major utilities have been trending lower and become poor investment choices. A slowing global economy isn’t helping matters either. Here is a sell alert for three utilities stocks to dump ASAP.
American Water Works (AWK)
American Water Works (NYSE:AWK) is a public utility that provides water and wastewater services to 1,700 communities in 14 states. Collectively, 14 million Americans are served by American Water Works. Despite its reach, American Water Works’ stock has been under pressure, having declined 10% over the past year, including a 7% pullback in 2023. The company’s share price hit an all-time high in December 2021 and has since fallen 22%.
In July, analysts at Guggenheim Partners lowered their price target on AWK stock to $147 a share from $152 previously. This followed a similar downgrade by Bank of America (NYSE:BAC), which dropped its price target on American Water Works’ stock to $139 from $140 and slapped the security with a “sell” rating. Analysts cite concerns about a difficult regulatory environment and high valuation as the reasons for their downgrades.
AWK stock is currently trading at 30 times future earnings, making it a utility stock to dump.
NextEra Energy (NEE)
NextEra Energy (NYSE:NEE) is the largest electric utility holding company by market capitalization in the U.S. Among its subsidiaries is Florida Power & Light. The company has annual revenues approaching $20 billion and 15,000 employees. Yet NEE stock has also been challenged, down 18% in the last 12 months, including a 15% decline this year. The share price also peaked in December 2021 and has since dropped 25%.
NextEra Energy’s stock is more attractively valued than AWK stock, trading as it does at 17 times forward earnings. NEE stock also offers shareholders a decent quarterly dividend payment of 47 cents a share, which equates to a yield of 2.65%.
However, these facts have not been enough to move the needle on the company’s shares in a positive direction. Concerns have been raised about the company’s growing push into renewable energy sources and the attendant expense. NextEra is the world’s largest generator of energy from the wind and sun.
Brookfield Renewable (BEP)
A Toronto-based company, Brookfield Renewable Partners (NYSE:BEP) is also a major producer of renewable energy, owning more than 200 hydroelectric plants, 100 wind farms, and over 550 solar facilities. While environmentalists might sing the praises of Brookfield Renewable, investors have been taking a pass on the stock. Over the last 12 months, BEP stock has lost 30% of its value. The shares are currently trading 37% below their 52-week high.
While many analysts praise Brookfield Renewable’s dividend that yields more than 4%, the stock has been challenged by inconsistent earnings and heavy spending on developing its renewable energy assets. The company must also run a gauntlet of costly and time consuming regulatory hurdles to bring new projects online. These issues help explain why BEP stock has been trending lower over the last year, raising a sell alert for this utility stock.
On the date of publication, Joel Baglole held a long position in BAC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.