Why Eversource Energy (NYSE:ES) Presents a Compelling Undervalued Opportunity Amid Regulatory Challenges

Investors often overlook utilities stocks due to their perceived lack of growth, but Eversource Energy (NYSE:ES) is an exception. Despite short-term regulatory headwinds and a P/E ratio that appears elevated relative to peers, ES is undervalued when considering its dividend yield, strategic capital allocation, and long-term growth catalysts. Here's why now is the time to act.

The Contrarian Case for Eversource: Outperformance Meets Underappreciated Value

While Eversource's stock has risen 13.23% YTD—outpacing the S&P 500's paltry .34%—its valuation metrics have yet to fully reflect its intrinsic worth. A closer look reveals:

1. Dividend Powerhouse with Room to Grow

Eversource boasts a 4.4% dividend yield, significantly higher than the Utilities sector average of 3.26%, and it has maintained this payout despite recent volatility. The sale of its Aquarion water utility segment—expected to close by year-end—will strengthen its balance sheet and free up capital for regulated electric and gas infrastructure projects. With a 5–7% EPS growth target through 2028, the dividend appears sustainable and could rise further as earnings stabilize.

2. Strategic Divestitures and Capital Allocation

The Aquarion sale, priced at $2.4 billion, marks a critical shift toward focusing on core regulated assets. While the transaction will result in a $300 million Q4 2024 loss (due to tax expenses and goodwill write-offs), it unlocks $1.5–2 billion in new capital opportunities for grid modernization and decarbonization projects. These initiatives align with its $48.5 billion 10-year capital plan, driving rate base growth of 8% annually through 2029.

3. Valuation Metrics Paint a Contrarian Picture

While Eversource's P/E ratio of 27.7x exceeds the utilities sector average of 20.8x, this premium is temporary. The recent net loss ($442 million) skewed earnings, but operating cash flows remain robust, and the Aquarion-related charges are non-recurring. Key metrics to watch:
- EV/EBITDA of 12.1x: Below the sector's historical premium, suggesting undervaluation when considering growth.
- P/B ratio of 1.60x: Above the sector average (1.3x) but justified by its 48% higher dividend yield and regulated asset portfolio.

4. Analysts Are Bullish, but the Market Lags

The consensus 12-month price target of $69.27 implies a +9% upside, yet the stock trades below this at $63.46. Analysts cite underappreciated risks, such as Connecticut's regulatory overhang, but these are already priced in. Meanwhile, 48% of investors surveyed by MarketBeat prioritize dividend yield over growth, making ES a standout in its peer group.

Why Now is the Sweet Spot to Buy

The market has yet to fully acknowledge Eversource's strategic pivots:
- Debt Reduction: Proceeds from Aquarion will lower leverage, improving credit metrics.
- Regulatory Resolution: Connecticut's disputes are nearing closure, reducing uncertainty.
- ESG Alignment: While current ESG initiatives lag peers, its $45 billion clean energy plan (including solar and storage hubs) positions it to outperform in the coming decade.

Risks and Mitigants

• Regulatory Delays: Connecticut's approvals could impact timelines, but Eversource has a track record of securing favorable rate cases.
• Earnings Volatility: One-time charges may pressure near-term EPS, but cash flows remain steady. Historically, this volatility has impacted short-term strategies: a backtest of buying on earnings release dates and holding for 30 days (2020–2025) showed an average return of -4.68%, with a maximum drawdown of -30.06%. This underscores the risks of short-term timing approaches.

Conclusion: A Rare Utility Gem with Upside

Eversource Energy is a contrarian's dream: a high-yield dividend stock with growth embedded in its regulated utility model, discounted relative to its peers. With the Aquarion sale behind it and a clear path to capital-light growth, ES offers a rare blend of income and appreciation potential. Investors seeking stability and upside in a volatile market should act now—before the market catches up to this undervalued opportunity.

Disclosure: The author holds no position in Eversource Energy but may initiate one based on this analysis.

This article is for informational purposes only and should not be considered financial advice. Always conduct your own research before making investment decisions.