DTE vs. Xcel: Which Utilities Stock is a Better Buy?

The utilities sector consists of companies that provide electricity, natural gas, water, and wastewater services to various customers, including residential, commercial, industrial, and government. According to Research and Markets, the global utilities market is estimated to grow at a CAGR of 7% over the next three years, reaching $5996.57 billion by 2025. 

The utilities sector tends to be relatively stable during different business cycles amid highly inelastic demand for its services. As a result, the utilities sector, which is represented by the Utilities Select Sector SPDR ETF (XLU), has returned 11.6% since the beginning of the year, underperforming the broader market. Yes, the XLU is up 2.41% in the past month, as the S&P 500 has slid 3.44%.

As the volatility in the market continues to increase, investors might want to consider adding utilities stocks to their portfolios.  Therefore, today I’ll analyze and compare two utilities stocks: DTE Energy Company (DTE) and Xcel Energy Inc. (XEL).  

Founded in 1903, DTE engages in utility operations, operating through five key segments: Electric, Gas, Gas Storage and Pipelines, Power and Industrial Projects, and Energy Trading. 

Based in Minneapolis, Minnesota, XEL is a company that generates, transmits, distributes, and sells electricity. Year-to-Date, shares of DTE Energy have gained 12.87%, while XEL stock has advanced 0.49%.

Recent Developments

On December 9th, DTE Energy announced that the Michigan Public Service Commission had approved an $84 million rate increase for DTE Gas. As a result, the average residential consumer’s bill will rise by $3.18 per month. Even with that increase, consumers will save over $20 per month thanks to DTE’s buying strategies, which contracted and stored natural gas earlier this year before the global natural gas prices run up. 

On December 8th, Xcel Energy declared a quarterly dividend of $0.4575, in line with the prior dividend. Considering the current annualized dividend payout of $1.83, the company’s forward yield stands at 2.73%. Also, the company has a payout ratio of 61.61%, with a 5-year dividend CAGR of 6.11%. XEL has also been consistently increasing its dividends 18 years in a row. 

Financial Overview & Analysts Estimates 

In Q3, DTE Energy's top line rose 20.61% on a year-over-year basis to $3.72 billion. This revenue growth was driven by higher revenues in Utility and Non-utility operations, while the Energy Trading segment demonstrated the highest growth rate, assisting DTE to surpass Wall Street's revenue estimates by $370.19 million. 

However, the company’s net income stood at $25 million versus its year-ago value of $476 million. As a result, DTE reported a Non-GAAP EPS of $1.72, missing Wall Street expectations by $0.09.

The company should reward its shareholders with an annual dividend payout of $3.54 per share, leading to a forward yield of 3.04%, which almost matches the sector’s median threshold of 3.27%. Also, the company has 12 years of dividend growth, increasing its dividends at a 5-year growth rate of 6.47%.

For the fourth quarter, the analysts expect DTE's EPS to stand at $1.00, which is a decrease compared to $1.39 a year ago. Besides, an $3.18 billion average revenue projection for Q4 indicates a 3.27% YoY decrease.

On October 28th, Xcel Energy Inc. reported earnings for the third quarter of 2021. In Q3, total revenue has grown 9.1% year-over-year to $3.47 billion, driven by higher sales in the regulated electric utility segment. The company also managed to beat analysts' revenue estimates by $55.82 million. XEL reported a Non-GAAP EPS of $1.13, missing Wall Street expectations by $0.04.

Currently, Wall Street estimates XEL's EPS to rise 7.4% year-over-year in the fourth quarter to $0.58 per share. Following the same trend, analysts expect that its Q4 revenue should increase to $3.1 billion. This estimate implies a rise of 5.25% on a year-over-year basis.

Comparing Valuations

In terms of P/E TTM, XEL is currently trading at 22.95x, which is higher than DTE, whose multiple is currently standing at 16.08x. In addition, DTE's P/E TTM multiple looks undervalued compared to the sector's median of 19.56x. 

When it comes to the Forward EV/EBITDA multiple, XEL's EV/EBITDA multiple of 13.59x is 4.5% higher than DTE's 13.00x. However, both companies look slightly overpriced compared to the sector median of 12.04x.

Finally,  DTE's P/CF TTM of 6.87x is significantly lower than XEL's 16.02x. DTE also looks cheap compared to the sector's median of 11.14x.

Conclusion 

Putting it all together, I believe DTE is a better long-term “buy” candidate. Although its top and bottom-line growth is expected to decelerate in the coming quarter, the company has a higher dividend yield as well as a slightly higher 5-year dividend growth rate. In addition, DTE’s Q3 financials look more attractive. Finally, DTE looks cheaper from a valuation standpoint, providing investors with a higher margin of safety.

DTE shares were trading at $115.74 per share on Monday afternoon, down $0.86 (-0.74%). Year-to-date, DTE has gained 18.04%, versus a 21.98% rise in the benchmark S&P 500 index during the same period.

Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.

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