Evergy, Inc. (NASDAQ:EVRG): ROE Recovery Meets High Leverage—A Utility Stock's Delicate Balancing Act

Evergy, Inc. (NASDAQ:EVRG) has emerged as a paradox in the utility sector: its return on equity (ROE) has surged to a decade high, yet its debt-to-equity ratio has hit a record level. This juxtaposition raises a critical question for investors: Does Evergy's improved profitability outweigh its elevated leverage, or is the company walking a tightrope between growth and risk? Let's dissect the numbers to find out.

ROE: A Resurgence, but Lagging Peers

Evergy's TTM ROE of 10.62% as of June 2025 marks a dramatic turnaround from its 0.08% nadir in late 2022. The rebound, driven by regulatory wins in Missouri and Kansas and cost discipline, has outpaced its historical averages (7.95% over ten years). However, this metric still trails key peers like CMS Energy (12.49%) and DTE Energy (13.26%), signaling room for improvement. The question is whether Evergy can sustain this momentum without overextending its balance sheet.

Debt Dynamics: High Leverage, High Risks

Evergy's debt-to-equity ratio of 1.45 as of March 2025 is the highest in 13 years and far exceeds the 0.88 industry median for regulated utilities. This leverage has been fueled by investments in renewable energy projects and infrastructure upgrades, such as solar farms and natural gas plants. While these moves align with long-term sustainability goals, they come with consequences. Interest expenses have risen, and the company's equity growth lags behind debt accumulation—total debt has surged from $5.67 billion in 2010 to $22.29 billion by late 2024.

The risks are clear: higher interest rates or a slowdown in energy demand could strain cash flow. Yet, Evergy's regulated utility model—characterized by steady demand and rate-based earnings—provides a buffer. The company's reaffirmed $3.92–$4.12 EPS guidance for 2025 and 4–6% annual growth through 2029 suggest management confidence, though these targets hinge on executing projects like Missouri's Senate Bill 4 and Kansas' wildfire mitigation initiatives.

Valuation: A Mixed Picture

At current prices, Evergy trades at a P/E ratio of 18.5x (based on 2025 EPS guidance), slightly above the sector average of 16–17x. This premium reflects optimism about its regulatory tailwinds and low-carbon transition. However, the high leverage clouds the valuation. Investors must weigh whether the stock's dividend yield of 2.8% (based on the $0.6675 quarterly payout) justifies the risk.

Peer Comparison: A Midfield Utility

While Evergy's ROE recovery is impressive, its debt-to-equity ratio ranks worse than 71% of peers, per GuruFocus. This divergence highlights a trade-off: Evergy is prioritizing growth over balance-sheet conservatism. For instance, Alliant Energy (ATO), with an ROE of 10.70% and a debt-to-equity ratio of 1.07, offers a more balanced profile. Investors seeking pure safety might prefer Pinnacle West Capital (PNW), which sports an ROE of 8.93% and a 0.65 debt-to-equity ratio.

Investment Takeaways

1. Hold for Income and Growth: Evergy's dividend yield and long-term EPS targets make it a viable holding for income-focused investors, provided they accept the leverage risk.
2. Beware of Rate Hikes: Rising interest rates could pressure earnings unless Evergy locks in low-cost financing. Monitor its interest coverage ratio (currently ~8x, healthy but declining).
3. Sector Rotation Play: If utilities outperform as a defensive sector in a volatile market, Evergy's ROE recovery could propel it to outperform laggards.

Final Verdict

Evergy's ROE resurgence positions it as a middle-of-the-pack utility stock: compelling for growth but not without risks. Investors should hold the stock if they believe regulators will continue to favor infrastructure investments and if Evergy can deleverage over time. However, those averse to balance-sheet risk may want to wait for a pullback or seek peers with stronger equity cushions. The verdict hinges on whether Evergy's bet on high leverage pays off—or becomes its Achilles' heel.