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Morningstar says these four utility sector names still have room to grow, with a 10% increase expected in 2024.



The utilities sector has had a strong rebound in 2024 after a slump in 2023, driven by excitement around artificial intelligence (AI) and data center demand. Utilities have surged about 10% this year, bouncing back from a 10.2% decline the previous year due to higher interest rates. Travis Miller, an energy and utilities strategist for Morningstar, believes that utilities were underestimated by the market, leading to their recent rally of over 25%. He sees continued growth opportunities in the sector, with competitive yields translating into attractive returns for investors. Miller highlights NiSource, Entergy, WEC Energy, and Duke Energy as his team’s top picks in the sector.

NiSource, a utility company, is poised to benefit from the growth of manufacturing and data centers, with its recent deal to provide electricity and natural gas to a new Microsoft data center in Indiana. Miller forecasts that NiSource will invest at least $17 billion in its networks over the next five years, supporting a base earnings growth estimate of 7% annually. With a dividend yield of 3.7% and potential for 20% upside from his $34 per share fair value estimate, NiSource is an attractive pick for investors looking for growth potential in the utilities sector.

WEC Energy, another utility company, is set to see a boost from AI data center development, particularly with Microsoft’s $3.3 billion expansion plan in Wisconsin. The company’s management expects an annual electricity demand growth of 4.5% to 5% in 2026-2028, among the highest of all US utilities. Morningstar analyst Andrew Bischof has a fair value estimate of $96 per share on WEC Energy, offering nearly 20% upside potential. Despite a 4.2% yield and a slight decline in shares in 2024, WEC Energy remains a strong contender for investors seeking exposure to the growing AI data center market.

Entergy, a utility company operating on the Gulf Coast, is expected to benefit from industrial customer growth and increasing demand for renewable energy. Miller’s team anticipates the company to invest around $7 billion annually to upgrade its electrical grid and expand its clean energy portfolio. Entergy has been raising its dividend by approximately 6% annually, with a current yield of 4.1%. With a fair value estimate of $123 per share, reflecting a 12% upside potential, Entergy presents a compelling investment opportunity for those looking for stability and growth in the utilities sector.

Overall, the utilities sector has rebounded strongly in 2024, propelled by AI excitement and growing data center demand. Despite challenges from higher interest rates, utility companies such as NiSource, WEC Energy, and Entergy are well-positioned to capitalize on these trends and offer attractive opportunities for investors. With positive prospects for earnings growth, dividend yields, and potential stock price appreciation, the utilities sector presents a compelling investment case for those seeking stable returns and long-term growth in their portfolios.

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