Why Utility Stocks Are No Longer the Easy AI Trade

Core Viewpoint - Electric utility stocks have seen a decline as initial excitement over AI demand has shifted to concerns about rising consumer prices and regulatory backlash [1] Group 1: Rate Base Growth - Wall Street primarily focuses on the growth of the rate base for utility financial valuation, as earnings are set as a percentage of the rate base [2] - The US utility rate base is projected to grow at a rate of 9% over the next five years, despite expected sales growth of only 3% per year [2] - The average utility plant is over 30 years old, and new plants cost significantly more due to inflation, which justifies the increase in the rate base [2] Group 2: Financial Projections - The utility rate base in 2024 is estimated at $1,573 billion, with projected five-year capital spending of $1,350 billion, leading to a rate base of $2,513 billion by 2029, a 60% increase [3] - To fund the $1,350 billion capital spending, internal sources could provide $550 billion, while the industry will need to raise $553 billion in debt and $247 billion in equity [4] - Selling shares above book value can actually increase earnings per share for existing shareholders, despite the dilution from increased shares [4] - Net income for shareholders is expected to rise in line with the equity account increase of 60%, leading to an estimated earnings per share growth of 30% over the period, or about 5.5% per year [4]