Alpha-Centric ESG Research

Kyle Rudden

In <a href="https://www.smartkarma.com/insights/u-s-elections-and-esg-impacts-on-people-planet-and-profit" target="_blank" data-smartkarma-citation="insights:42655" rel="noopener">U.S. Elections and ESG: Impacts on People, Planet… and Profit</a>, I discussed major universally-relevant implications of the 2020 U.S. elections from an ESG and Triple Bottom Line perspective, and using the three TBL pillars for structure: 1) Environmental, 2) Social and Governance, and 3) Economic. That report was a deep dive, but nonetheless largely stayed on the macro level.
This Insight is one of several regionally-focused reports analysing the U.S. elections – candidates, their policy positions, and implications of evolving election outcome scenarios – on a more micro plane. Specifically, implications for regional markets, sectors, and stocks based on the policies of the Democrat and Republican tickets in conjunction with Congressional election result scenarios.
Consider this the inaugural report for North America-focused coverage of the 2020 elections. It will be updated, and more importantly built upon, over the next two months (all elections are held on 3 November) as significant events unfold. This initial report lays the basic foundation for that future coverage. In particular, it addresses the following topics (which also approximate an outline):
<ul>
<li>Overview of major policy proposals or plans for U.S. and Canadian markets, sectors, and stocks</li>
<li>U.S. and Canadian sectors/stocks that benefit/lose from Biden climate and infrastructure plans</li>
<li>U.S. and Canadian sectors/stocks that benefit/lose from Biden corporate tax policies and hikes</li>
<li>High-level summary of the most consequential points addressed in the aforementioned Insight</li>
</ul>

In U.S. Elections and ESG: Impacts on People, Planet… and Profit, I discussed major universally-relevant implications of the 2020 U.S. elections from an ESG and Triple Bottom Line perspective, and using the three TBL pillars for structure: 1) Environmental, 2) Social and Governance, and 3) Economic. That report was a deep dive, but nonetheless largely stayed on the macro level.
This Insight is one of several regionally-focused reports analysing the U.S. elections – candidates, their policy positions, and implications of evolving election outcome scenarios – on a more micro plane. Specifically, implications for regional markets, sectors, and stocks based on the policies of the Democrat and Republican tickets in conjunction with Congressional election result scenarios.
Consider this the inaugural report for North America-focused coverage of the 2020 elections. It will be updated, and more importantly built upon, over the next two months (all elections are held on 3 November) as significant events unfold. This initial report lays the basic foundation for that future coverage. In particular, it addresses the following topics (which also approximate an outline):

Overview of major policy proposals or plans for U.S. and Canadian markets, sectors, and stocks
U.S. and Canadian sectors/stocks that benefit/lose from Biden climate and infrastructure plans
U.S. and Canadian sectors/stocks that benefit/lose from Biden corporate tax policies and hikes
High-level summary of the most consequential points addressed in the aforementioned Insight


U.S. Elections and ESG: Impacts on People, Planet… and Profit (North America)

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

Morningstar provides data on more than 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 16 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement or management as of June 30, 2015. We have operations in 27 countries.

Download the Morningstar Fact Sheet : http://corporate.morningstar.com/US/documents/MarketingFactSheets/AboutMorningstarFactsheet.pdf

Thematic (Sector/Industry)

Utilities continue to find ways to grow, employing $1.1 trillion in capital spending over the past decade, and we see a long runway for additional capital spend over our forecast. Edison Electric Institute, the electric industry's trade association, forecasts $223.9 billion in capital expenditures the next two years. But EEI has a history of being conservative with its estimates, and we think this remains true with its current forecast. We forecast industry capital expenditures of $279.2 billion.Capital growth drives earnings and dividend growth. We forecast median 6.4% earnings growth and 5.5% dividend growth from 2019-22. However, investors have caught on to U.S. utilities' long-term growth prospects, driving valuations to a median 12% premium to our fair value estimates. If interest rates stay low and utilities' valuations stay rich, long-term investors could realize 10%-14% total returns from a combination of current dividend yields (3%-5%) and our earnings growth outlook (7%-9%) based on the sector's infrastructure needs. But should market valuations converge to our fair value estimates as we expect, investors would see flat returns.<hr><h2>Key Takeaways</h2><ul>
<li>Capital Expenditure Forecast: We forecast utilities we cover will spend nearly $449 billion over the next four years, fueling a healthy median 6.4% earnings growth and 5.5% dividend growth.</li>
<li>Transmission and Distribution Winners: Transmission and distribution investments represent nearly 65% of our projected total utility investments. These investments facilitate the continued transition from coal generation to natural gas and renewable energy. We highlight <a href="https://www.smartkarma.com/entities/1796" target="_blank" data-smartkarma-citation="entities:1796:1">Sempra Energy (SRE US)</a> and <a href="https://www.smartkarma.com/entities/16455" target="_blank" data-smartkarma-citation="entities:16455:1">Edison International (EIX US)</a> for their electric transmission and distribution investment potential. <a href="https://www.smartkarma.com/entities/13170" target="_blank" data-smartkarma-citation="entities:13170:1">Atmos Energy (ATO US)</a> tops peers with gas distribution investments.</li>
<li>Renewable Energy Winners: We project renewable energy, excluding hydro, will grow 70% to 659 terawatt-hours from 2017 to 2025 and represent almost 15% of the U.S. generation, up from 9.6% in 2017. <a href="https://www.smartkarma.com/entities/7402" target="_blank" data-smartkarma-citation="entities:7402:1">Nextera Energy (NEE US)</a> and <a href="https://www.smartkarma.com/entities/26503" target="_blank" data-smartkarma-citation="entities:26503:1">Avangrid Inc (AGR US)</a> are particularly well positioned to capture this opportunity.</li>
</ul>

Utilities continue to find ways to grow, employing $1.1 trillion in capital spending over the past decade, and we see a long runway for additional capital spend over our forecast. Edison Electric Institute, the electric industry's trade association, forecasts $223.9 billion in capital expenditures the next two years. But EEI has a history of being conservative with its estimates, and we think this remains true with its current forecast. We forecast industry capital expenditures of $279.2 billion.Capital growth drives earnings and dividend growth. We forecast median 6.4% earnings growth and 5.5% dividend growth from 2019-22. However, investors have caught on to U.S. utilities' long-term growth prospects, driving valuations to a median 12% premium to our fair value estimates. If interest rates stay low and utilities' valuations stay rich, long-term investors could realize 10%-14% total returns from a combination of current dividend yields (3%-5%) and our earnings growth outlook (7%-9%) based on the sector's infrastructure needs. But should market valuations converge to our fair value estimates as we expect, investors would see flat returns.Key Takeaways
Capital Expenditure Forecast: We forecast utilities we cover will spend nearly $449 billion over the next four years, fueling a healthy median 6.4% earnings growth and 5.5% dividend growth.
Transmission and Distribution Winners: Transmission and distribution investments represent nearly 65% of our projected total utility investments. These investments facilitate the continued transition from coal generation to natural gas and renewable energy. We highlight Sempra Energy (SRE US) and Edison International (EIX US) for their electric transmission and distribution investment potential. Atmos Energy (ATO US) tops peers with gas distribution investments.
Renewable Energy Winners: We project renewable energy, excluding hydro, will grow 70% to 659 terawatt-hours from 2017 to 2025 and represent almost 15% of the U.S. generation, up from 9.6% in 2017. Nextera Energy (NEE US) and Avangrid Inc (AGR US) are particularly well positioned to capture this opportunity.


Capital Investment Drives Utilities' Growth, but Valuations Are Rich

United States

Avangrid, Inc. operates as an energy services holding company. The Company engages in the regulated energy transmission and distribution business through wind and solar power, as well as natural gas utilities. Avangrid serves customers in the United States.

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Avangrid (AGR US)

U.S. Elections and ESG: Impacts on People, Planet… and Profit (North America)

In U.S. Elections and ESG: Impacts on People, Planet… and Profit, I discussed major universally-relevant implications of the 2020 U.S. elections...

Kyle Rudden

Capital Investment Drives Utilities' Growth, but Valuations Are Rich

Utilities continue to find ways to grow, employing $1.1 trillion in capital spending over the past decade, and we see a long runway for additional...

Morningstar, Inc.

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