Investors are turning their attention to the utility sector, recognizing it as a rare growth opportunity fueled by increasing electricity demand. Data centers, which power contemporary artificial intelligence (AI) algorithms, are a major contributor to rising energy needs over the next few years. Consequently, utility companies with significant resources have become appealing stocks for capitalizing on the AI-driven energy surge.
Two prominent utility stocks for investors to consider are Constellation Energy (CEG +0.18%) and NextEra Energy (NEE +1.21%). Both utility stocks operate on different business models, accommodating varied risk tolerances and investment approaches. If you’re pondering an investment between these two options, here’s what to consider now.
Utilities as Major Suppliers of Nuclear and Renewable Energy
Constellation Energy specializes in nuclear power and is currently the largest nuclear operator in the U.S. Its fleet can supply baseload, carbon-free energy, which is particularly appealing to tech companies needing reliable energy continuously. Recently, the company has formed power purchase agreements with Microsoft to reactivate the Three Mile Island Unit 1 (now called the Crane Clean Energy Center) and with Meta Platforms for nuclear energy sourced from its Clinton Power Station in Illinois.
Diverse Business Models of Constellation Energy and NextEra Energy
Constellation Energy serves as an independent power producer, owning facilities that generate electricity and selling it through power purchase agreements (PPAs) or at market rates. This structure allows Constellation to benefit significantly from rising electricity prices, often termed a merchant model. However, this model entails higher risks, especially with regulatory constraints on increasing utility rates.
In contrast, NextEra Energy functions more as a regulated utility provider, focusing heavily on renewables like wind and solar power. A significant portion of its income is derived from Florida Power & Light. Being a regulated utility means government oversight of the rates it can charge, ensuring stable earnings and predictable revenue over time.
Choosing the Right Utility Stock for You
When deciding between these two stocks, it’s important to factor in your risk appetite. For conservative investors, NextEra Energy’s regulated utility model offers greater stability. Additionally, it’s ideal for income-focused investors, showcasing a dividend yield of 2.7% and a history of increasing its payout for 32 consecutive years.
Conversely, Constellation Energy presents investors with potential gains from rising utility prices. Analysts predict that Constellation may see its non-GAAP earnings per share increase by 25% and 17% in the coming two years, whereas NextEra’s EPS is anticipated to grow steadily at around 9% annually.
If you’re looking for a defensive utility with a growing dividend, NextEra Energy may be your best bet. However, if you believe in the surge of AI infrastructure and the energy demands of data centers and are willing to accept more risk, Constellation Energy offers significant upside potential.
