Are utility stocks overvalued? A balanced guide

Are utility stocks overvalued?

Are utility stocks overvalued is a question many individual and institutional investors have asked since the sector rallied and began trading on more growth-oriented assumptions. This article examines the valuation debate for regulated and non‑regulated electric, gas, water and related utility companies, explains commonly used metrics (P/E, DDM, EV/EBITDA, P/FCF), reviews recent market developments that push valuations higher or lower, and offers a practical checklist you can use to decide whether a particular utility stock looks overvalued.

Reading this guide you will: (1) understand why utility valuation matters now, (2) learn which indicators suggest overvaluation or fair value, (3) see short case studies (Duke, PG&E, Sempra, NextEra), and (4) get a clear checklist for assessing individual names. For trading and portfolio tools, consider Bitget products for tracking and execution.

Characteristics of utility stocks

The utilities sector typically includes regulated electric, gas and water companies plus merchant power generators and integrated energy firms with utility operations. Core characteristics that affect valuation include:

• Regulated revenue models: Many utilities earn regulated returns on invested capital (rate base) set by public utility commissions, producing predictable cash flows but limited upside.
• High capital expenditure (CAPEX): Utilities are capital intensive—building transmission lines, substations, pipelines and generation capacity requires long-term investment and financing.
• Stable cash flows and dividends: Because of predictable demand and regulation, utilities traditionally pay steady dividends and attract income-focused investors.
• Sensitivity to interest rates: Utility valuations are interest-rate sensitive. When yields on fixed-income rise, utility dividend yields must compete, pressuring prices; when yields fall, higher multiples can be justified.
• Business model differences: Regulated utilities (rate-regulated distribution/transmission) differ from merchant generators and integrated energy companies (which face market-price exposure). These differences matter for valuation and risk.

Recent market developments that affect valuation

AI, data‑centre demand and electrification

As of June 2024, sector commentary and research highlight a structural demand narrative tied to AI compute, data‑centre growth and broader electrification. Charles Schwab and Morningstar discuss how accelerating electricity demand from data centres, large cloud providers and electrification of transport can justify higher long‑term growth assumptions for selected utilities that own transmission, distribution and clean generation assets.

Investors asking "are utility stocks overvalued" must decide whether future incremental electricity demand is already priced in. Companies that can secure long‑term contracts with hyperscalers or capture new load via transmission upgrades may deserve premium multiples; names without that exposure may not.

Interest rates and cost of capital

Utility valuations are tightly linked to interest-rate moves and the cost of capital. When the policy rate or long-term Treasury yields rise, discounted cash flows fall, and dividend-paying stocks must offer higher yields to remain attractive versus fixed income. Conversely, falling rates compress discount rates and can justify higher P/E multiples.

Because utilities often carry substantial debt to fund CAPEX, changes in borrowing costs affect free cash flow and credit metrics; higher yields can therefore pressure both equity and credit valuations.

Sector re‑rating and performance since 2023

Since 2023 the utilities sector experienced a re‑rating: strong flows into dividend-growth stories and longs on electrification themes helped several large-cap utilities outperform. S&P Global and Morningstar note that investor sentiment shifted from defensive-income positioning to a growth-oriented view, lifting multiples for companies perceived as growth beneficiaries. That re‑rating is central to the "are utility stocks overvalued" debate—sector averages now price in higher growth than historical norms.

Valuation metrics used for utilities

Different valuation methods can produce different answers to "are utility stocks overvalued". Common approaches include:

Price‑to‑earnings (P/E) and forward P/E

P/E is widely used because it’s simple, but it has limits for utilities. Near-term earnings can be distorted by weather, one‑off charges, regulatory settlements or impairment. Comparing P/E to sector peers and historical averages is useful, but not definitive.

Examples from coverage (Simply Wall St, Finviz, Morningstar) show some large utilities now trade at higher-than-average forward P/Es, reflecting the market’s growth assumptions.

Dividend Discount Model (DDM) and yield‑based approaches

For mature, dividend-paying utilities, the DDM is a natural fit: future dividends discounted at a required return produce an intrinsic value. DDMs are sensitive to the chosen growth rate and discount rate—too optimistic growth or too low a discount rate can imply overvaluation. Simply Wall St’s analyses of Duke and PG&E illustrate how DDMs can flag overvaluation when dividend growth expectations appear aggressive versus regulatory and CAPEX realities.

Price‑to‑sales, EV/EBITDA, P/FCF, price/book

Complementary metrics help account for capital intensity and balance sheet structure. EV/EBITDA and P/FCF adjust for capital structure and cash generation, while price/book can be informative for regulated businesses where the regulated asset base (RAB) carries accounting relevance. Capital intensity and accounting for depreciation make cross-company comparisons noisy—hence combining metrics is advisable.

Analyst price targets and consensus

Analyst fair‑value frameworks and price targets often diverge. For example, AAII and Finviz commentary on NextEra show dispersion among analysts, with some labeling it expensive while others highlight growth drivers that underpin higher targets. Consensus therefore must be read alongside assumptions—margin, CAPEX, rate-case outcomes, and contracted revenues.

Evidence of overvaluation — sector‑wide indicators

Several cross‑source indicators suggest the sector may be priced for optimistic outcomes:

• Elevated sector multiples: Morningstar and other analysts reported sector P/E and forward P/E measures above long‑run averages, indicating a re‑rating.
• Compression of dividend yields vs. Treasuries: Lower relative yields reduce the income premium that historically attracted defensive buyers.
• High EV/EBITDA and P/S on large names: Some utilities trading at premium EV/EBITDA or P/S ratios suggest the market is pricing growth expectations into mature businesses.
• Narrative‑driven pricing: S&P Global and Charles Schwab highlight that AI/data‑centre and electrification narratives have become material drivers—markets that price narratives aggressively risk disappointment if growth is slower than expected.

These indicators support the claim that, at a sector level, investors should ask "are utility stocks overvalued" and test whether current prices reflect realistic growth, regulatory outcomes and interest-rate paths.

Evidence against broad overvaluation — counterarguments

Underpriced names and idiosyncratic opportunities

Morningstar and other stock‑pickers list utilities that remain undervalued on conservative models. Company‑specific situations—unresolved legal risks, temporary regulatory setbacks or recent share-price weakness—can create opportunities where the broader sector looks expensive.

Company‑specific factors that justify higher multiples

Some utilities may legitimately warrant higher multiples. Companies with secured long‑term contracts for data‑centre power, transmission projects that unlock regional congestion, or LNG/export projects with contracted cash flows (e.g., Sempra narratives) can justify premium valuations if contract and regulatory risks are well‑managed.

Diverging valuation frameworks produce different conclusions

Different methods yield different answers. DDMs emphasize dividends and low growth; narrative-driven tech-style multiples emphasize future revenue expansion. Simply Wall St analyses of Duke and PG&E show DDMs can flag overvaluation while PE comparisons or story-based analysis might not. The mixed signals explain why consensus on "are utility stocks overvalued" is not unanimous.

Case studies — selected company examples

Below are short, neutral summaries of published valuation takes (reporting date noted) to illustrate how the same company can appear overvalued or fairly priced depending on the framework used.

Duke Energy

As of June 2024, Simply Wall St’s DDM-style analysis suggested Duke Energy’s market price implied dividend growth assumptions that were higher than conservative forecasts, flagging potential overvaluation under a dividend-focused lens. Alternative PE-based views note Duke’s regulated rate base and steady earnings, which can make the company seem reasonably priced relative to peers if one assumes stable rate-case outcomes and steady CAPEX execution.

Key metrics to inspect for Duke: regulated rate-case timelines, CAPEX plans, payout ratio, and balance-sheet leverage.

PG&E

As of June 2024, Simply Wall St highlighted dichotomous signals for PG&E: DDM outputs suggested values below market price when future dividend growth assumptions were conservative, while PE comparisons sometimes looked more favorable. PG&E carries unique regulatory and legal overhangs (wildfire liabilities and costs) that materially affect valuation and risk premia.

For PG&E, pay attention to legal provisions, insurance/recovery mechanisms, rate-case approvals, and changes in wildfire mitigation costs.

Sempra

As of June 2024, Sempra’s growth narrative — including LNG infrastructure and regulated utility investments — supported a premium in some frameworks. Simply Wall St’s narrative‑driven writeup showed investor willingness to pay for LNG project upside but also noted project execution and regulatory approvals as critical value drivers. Depending on EV/EBITDA and DCF assumptions, Sempra can look modestly overvalued or fairly priced.

NextEra Energy

As of May–June 2024, Finviz and AAII commentary described NextEra Energy as a high‑multiple large-cap utility/renewables company. Following price appreciation, NextEra’s P/E and P/S expanded and some outlets labeled it expensive relative to traditional regulated utilities. Others emphasize NextEra’s growth pipeline in renewables and contracted revenues as justifying higher multiples.

Key items: contracted offtake, renewable pipeline execution, regulated vs merchant exposure, and sensitivity of consensus forecasts to renewable project delays.

Key risks that could correct valuations

Several downside catalysts could push utilities lower and answer "are utility stocks overvalued" with a clearer yes for some names:

• Rising interest rates: Higher yields increase discount rates and can reduce equity valuations across the sector.
• Regulatory setbacks: Unfavorable rate-case outcomes, disallowed costs, or new regulatory burdens can impair cash flows.
• Project delays and cost overruns: CAPEX escalations and delays on transmission, generation or LNG projects compress returns.
• Slowing demand growth: If AI/data‑centre adoption slows or electrification lags market expectations, growth assumptions baked into prices may prove too aggressive.
• Credit-rating pressure: Rising debt-service costs or higher leverage can pressure both cost of capital and dividend sustainability.

Key catalysts that could justify current valuations or drive further upside

Conversely, several positive developments could justify higher multiples or drive prices higher:

• Durable demand from AI/data centres and electrification: Confirmed long‑term contracts or observable load growth validate growth assumptions.
• Favorable rate cases and regulatory recoveries: Approvals that allow recovery of prudent CAPEX and provide reasonable returns support valuations.
• Successful project execution: On-time, on-budget LNG terminals, transmission upgrades or renewable projects convert potential growth into contracted cash flow.
• Falling interest rates: Lower rates reduce discount rates and support higher multiples for dividend-paying stocks.

Investment implications and strategies

The question "are utility stocks overvalued" has different answers depending on investor goals. Below are neutral, framework‑oriented considerations rather than recommendations.

For income‑focused investors

Income investors should evaluate dividend sustainability: payout ratios, cash flow coverage, regulated revenues and sensitivity to interest rates. If a utility’s dividend yield has compressed materially and payout ratios or credit metrics are stretched, the stock may be riskier despite a seemingly attractive yield.

For growth / total‑return investors

Total‑return investors should focus on exposure to structural demand drivers—data centres, transmission projects, and electrification—and evaluate whether those revenue opportunities are contracted and achievable. Pay a premium only when growth visibility is high and risks (execution, regulation) are manageable.

For value investors

Value investors should screen for companies with below‑peer multiples but healthy balance sheets and limited idiosyncratic legal/regulatory risks. Morningstar’s undervalued picks demonstrate that opportunities can exist even when the sector headline looks pricey.

Portfolio construction and risk management

Position sizing, diversification across regulated and merchant utilities, and monitoring macro indicators (interest rates, energy-demand trends, regulatory calendars) are key. Consider blending income names with growth‑exposed utilities to balance yield stability and upside participation.

How to judge if a particular utility stock is overvalued — a checklist

Use this practical checklist when you analyze a specific company and try to answer "are utility stocks overvalued" for that name:

1. Compare current P/E and forward P/E to sector peers and a 5–10 year historical average.
2. Check dividend yield vs the company’s historical yield and vs 10‑yr Treasury (adjusted for risk).
3. Run a simple DDM with conservative dividend growth (e.g., growth ≈ GDP or regulatory rate-base growth) and a reasonable discount rate; test sensitivity.
4. Review CAPEX plans and financing—are projects funded, and what is the expected return on invested capital?
5. Assess balance-sheet health: net debt / EBITDA, interest coverage, and maturity schedule.
6. Identify regulatory risks: upcoming rate cases, legal liabilities, or policy shifts that could disallow costs.
7. Examine contract coverage for growth projects—are new loads contracted long term or dependent on merchant pricing?
8. Gauge management guidance and analyst assumptions—are they aggressive relative to historic execution?
9. Look at ownership and flows—are dividend or thematic ETFs overweight the name, and could flows reverse?
10. Stress-test valuations under higher-rate and lower-growth scenarios to see potential downside.

Historical context

Historically, utilities were a defensive asset class: steady dividends, low beta and sensitivity to interest‑rate movements. The recent shift toward a growth narrative—driven by electrification and the need for new grid and generation capacity—represents a meaningful change. Where valuations were once anchored to income and regulated returns, they now incorporate growth optionality for some companies. That structural transition is central to whether one believes "are utility stocks overvalued" at a sector level or only for specific names.

Conclusion and next steps

Sector-level indicators show elevated valuations driven by growth narratives and a re‑rating since 2023, lending support to the proposition that, in aggregate, are utility stocks overvalued is a reasonable concern. At the same time, the picture is cross‑sectional: certain utilities with secured growth, strong regulatory positions and healthy balance sheets may justify higher multiples, while others look expensive under conservative dividend or DCF frameworks.

Further analysis of any single company should follow the checklist above. If you want tools to track prices, run scenario analyses, or manage execution, explore Bitget’s product suite for portfolio monitoring and trade execution. For Web3 wallet needs, consider Bitget Wallet when linking crypto holdings to broader portfolio views.

Want a tailored analysis? Use the checklist on a target company and compare outputs across DDM, PE/forward PE, and EV/EBITDA to form a reasoned view on whether a specific utility stock is overvalued for your goals.

References and further reading

• As of June 2024, "Is Duke Energy Still Fairly Priced?" — Simply Wall St (company valuation analysis)
• As of June 2024, "Assessing PG&E" — Simply Wall St (PG&E valuation and risk overview)
• As of June 2024, "Sempra (SRE): Is the Utility Stock Overvalued?" — Simply Wall St (narrative and project risks)
• As of May–June 2024, "Is NextEra Energy Overvalued After Its Surge?" — Finviz (valuation note)
• As of May–June 2024, "Is NextEra Energy, Inc. (NEE) Overvalued?" — AAII (Value Grade discussion)
• As of April–June 2024, "Utilities Lose Defensive Touch as AI Ignites Rally" — Charles Schwab (sector narrative)
• As of 2024, "The Best Utilities Stocks to Buy" — Morningstar (undervalued name picks and sector analysis)
• As of 2024, "Is Now the Time to Invest in Utility Stocks?" — TSI Network (investor timing discussion)
• As of 2024, "Risk‑on investor attitude could drag US utility stock performance" — S&P Global (sentiment vs defensive sector analysis)
• As of 2024, "Are Dividend‑Paying US Utilities Now Growth Stocks?" — Morningstar (Global) (narrative on growth vs income)

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Reporting notes: As of June 2024, the cited Simply Wall St company writeups and sector commentary (Simply Wall St, Finviz, AAII, Charles Schwab, Morningstar, TSI Network, S&P Global) provided the primary viewpoints summarized above.