Forget all the blather you hear from politicians about the Green New Deal. Renewable energy is likely to revolutionize the bottom line of America’s public utilities for its sheer cost advantage.

Over the next two decades, renewable energy ultimately will provide two-thirds of all the energy utilities consume to produce electricity, according to T. Rowe Price’s head of capital appreciation, David Giroux. That’s up from 18% today, or a fourfold increase.

In the process, the compound annual growth rate of the sector’s net income is likely to triple from 2.5% to 7.5%. That makes a stodgy industry look very intriguing, almost a no-brainer, particularly since most market savants are predicting that the 2020-2030 decade will hand investors a prolonged period of pedestrian returns. 

America’s electric utilities are pursing renewables because it’s cheaper, not to placate AOC or Bernie. The costs of wind and solar have plummeted dramatically and the renewable revolution is only a few years old. It is particularly noticeable across the Midwest.

“Putting up a wind farm is now cost-positive. It wasn’t five years ago,” Giroux said yesterday at a press briefing.

Most of the media’s attention in recent years has focused on converting from coal to natural gas. That is about to become yesterday’s story. Giroux said that by 2025, the cost of taking natural gas offline and converting to renewables will contribute in a big way to utilities’ bottom lines.

For those obsessed with a political perspective, there is an interesting twist to this trend. Utilities are “the one sector that could benefit from a [Elizabeth] Warren presidency,” Giroux observed.

But the big story for investors is what renewables can do for sleepy, old utilities’ profitability and why Wall Street’s take on the industry is completely outdated. Most investors view these companies as purely “a rate play” and a source of income.

This perspective was once accurate. But Giroux, who started his career analyzing automobiles and is extremely knowledgeable about disruption, says that has changed. Today, they represent the only “defensive sector without secular risk.” Between 1986 and 1998, the earnings per share (EPS) growth of the S&P 500 was 158%, or 8.5% while utilities’ profits were flat. Over the last decade, their EPS growth “have converged,” with the S&P’s EPS slowing to 6.1% and utilities climbing to 4.1%.

Over the last year, utilities stocks have enjoyed a nice run, mostly because of the big decline in interest rates. Giroux said now was “not the time to go all-in,” but if their shares fell 5%, it could be. Compared with consumer staples shares selling at 22 times earnings as they struggle with unit growth, utilities often are seen as more desirable alternative by income-oriented investors. Giroux thinks utilities are far more attractive, though his assessment is based industry dynamics and growth prospects more than income potential.

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