Bilanol
CenterPoint Energy (NYSE:CNP) has done rather well since I last visited the stock in April last year, giving investors a 44% total return since then, far outstripping the 4.7% return of the S&P 500 (SPY) over the same timeframe. It’s time to do another check on this well-respected utility stock and evaluate whether if it’s currently a buy, hold, or sell, so let’s get started.
Why CNP?
CenterPoint Energy is a utility company that owns and operates electricity and natural gas pipelines and provides electricity and natural gas to customers in Arkansas, Indiana, Louisiana, Minnesota, Mississippi, Ohio, Oklahoma, and Texas, serving over 7 million metered customers across its service territories.
What makes CNP a stable and growing company is that it’s insulated from competitive cost pressures in the deregulated Texas ERCOT market. That’s because it doesn’t participate in energy generation, instead relying on third-party generators and delivering power in the regulated Texas market for transmission and distribution.
As such, CNP assumes no electric generation cost risk and no retail pricing risk in its business in Texas, and makes its business more like that of a toll road. While its Houston distribution system makes up only 2.5% of the geographic footprint of Texas power utilities, it transmits and delivers around 25% of the total ERCOT summer peak electric load.
CNP is still in the early stage (year 2 of 10) of a large multi-year investment as it embarks upon a $40 billion plus capital spending plan, having invested $2 billion in the first half of this year alone. This progress has enabled CNP to reaffirm industry leading adjusted EPS growth of 8% annually through 2024, and 6% to 8% annually thereafter through 2030. Moreover, management anticipates continued customer growth in its key service territories, including at least 2% average annual customer growth in its Houston area.
Meanwhile, CNP continues to demonstrate profitable growth with adjusted EPS growing by an impressive 11% to $0.31 in the second quarter. This was driven by favorable weather, usage, and continued organic growth in its Houston Electric service territory. These strong results led management to raise its full year 2022 guidance for adjusted EPS to be $1.38, equating to a respectable 9% increase over last year.
Looking forward, CNP is staying ahead of political and ESG risks, as it’s making meaningful progress towards its clean energy goals. This is reflected by management’s comments during the recent conference call:
Our generation transition plan to cleaner fuels aligns with our peer leading 2035 Scope 1 and 2 net zero emissions goals. I am also pleased to say today that despite the well-known challenges around solar power, our recently signed agreements will bring us to over 800 megawatts of owned or contracted solar. So those are our latest headlines. We strive to continue our track record that we have established over the past two plus years of executing on this world class investment thesis.
Meanwhile, CNP maintains a strong BBB+ rated balance sheet and pays a well-covered 2.2% dividend yield with a 45.6% payout ratio. The one drawback that I see is that CNP appears to be fairly valued at the current price of $32.59 with a forward PE of 23.6, with earnings expected to grow in the 8% range annually over the next couple of years. As such, I would recommend waiting for a pull back of at least 10% before layering into this stock.
Investor Takeaway
Overall, CenterPoint Energy is a well-run utility company that’s in the early stages of a large multi-year investment program. The company is insulated from competitive cost pressures and has a strong balance sheet. It appears to be fairly valued at the current price, and I would recommend waiting for a pullback before buying. As such, income investors may want to keep a watchful eye on this stock.
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