Best utility stocks: how to pick them the smart way

To pick utility stocks with judgment, start with the regulatory framework and the predictability of income. Ask yourself: what percentage of its profit comes from the regulated (stable) activity and how much from business exposed to market prices (volatile)? The more regulated, the more it behaves like a bond and the fewer shocks it will give you. Then look at the allowed return on capital (*allowed ROE*) its regulator grants: it's the realistic ceiling on what it can earn, and it varies quite a bit between states.

The second critical point is the balance sheet. Utilities are among the most indebted companies in the market because building grids and plants costs billions. A company with controlled debt, a solid credit rating and low financing costs holds up much better against rate hikes. This is where analysis of quality and competitive advantage comes in: DeepTicker's DeepTicker Score grades the Solvency and Profitability of each company from 0 to 100 by comparing it to its own sector, so you immediately see whether a utility has a strong balance sheet for its standards or is playing on the edge.

In utilities with good fundamentals there are ratios that rule more than in other sectors. The payout ratio (what part of the profit is paid out as a dividend) tells you whether the dividend is sustainable: a payout of 60-70 % is common and reasonable; above 90 % the payout can be at risk if a bad year arrives. The dividend yield matters, but a runaway yield is usually an alarm signal, not a bargain: the market is pricing in a cut. Net debt / EBITDA measures how heavy the leverage is; in utilities it's normal to see it higher than in other sectors, but it's worth comparing it to peers.

The growth of the rate base (the regulated asset base on which the company earns its allowed return) is the best indicator of future profit growth. And ROIC —return on invested capital— reveals whether the company creates value or only grows by spending. To assess whether it's cheap or expensive, the Reverse DCF DeepTicker applies (discounted cash flow valuation) uses the real sector cost of capital: utilities have a low WACC, around 6 %, because their cash flow is stable. Using that 6 % instead of a generic figure changes the estimated value notably, which is why valuing them with the correct sector figure makes the difference.

The biggest risk in utilities is their sensitivity to interest rates. When rates rise, two things happen at once: the company pays more to refinance its enormous debt, and its juicy dividend loses appeal versus "risk-free" fixed income, which now pays more. That's why utility share prices tend to fall when the market anticipates rate hikes, even if the business itself hasn't changed. It's a market risk, not an operating one, but it hits the returns of whoever buys expensive.

There are more fronts. Regulatory risk is enormous: a hostile regulator can cut the allowed return and sink years of forecasts. Utilities also face operating and disaster risks (fires, storms) that can generate multibillion-dollar liabilities, as has happened with power companies affected by wildfires. And the energy transition forces gigantic investments: whoever executes it well will grow, whoever manages it badly will destroy value. Filtering by solvency and regulatory quality, instead of chasing the highest yield, is the best defense against these risks.

Reviewing dozens of utilities one by one by hand isn't feasible. A screener lets you filter the whole sector by the metrics that really matter in seconds. With the DeepTicker stock screener and its 140+ filters you can, for example, ask for utilities with a payout below 75 %, net debt/EBITDA reasonable for the sector, rising ROIC and a high Solvency DeepTicker Score, and get a short list of quality candidates that you then study one by one.

This isn't choosing for you: it's about cutting the noise so you spend your time on the companies that deserve analysis. On that list, the DeepTicker stock profiles show you the Reverse DCF (is it cheap or expensive today?) and the breakdown of the DeepTicker Score by dimension, with every number explained. That way you don't just find candidates: you understand why one utility is better than another, and you learn the criteria by using them. Remember it's information so you decide, not a buy recommendation.

A quality utility bought expensive can be a bad investment, and a mediocre utility bought very cheap can deliver pleasant surprises. So it's always worth separating two questions. The first, is the company good?, is answered by quality analysis and the DeepTicker Score: does it have a solid balance sheet, favorable regulation and stable profitability? The second, is it cheap or expensive today?, is answered by the Reverse DCF (discounted cash flow valuation): it tells you what growth the current price is pricing in and you judge whether that's credible for a business that grows at a single digit.

Value analysis adds a third lens that's very useful in stable sectors like this: the EPV (value of current earnings assuming no growth). In a regulated utility, where growth is slow and predictable, working out how much the business is worth "as is" today is an excellent anchor to avoid overpaying. If the price implies growth above the cost of capital, the warning fires that the price is mathematically demanding. By combining quality + price + franchise, you have the full picture to choose, among undervalued utility stocks, the ones that truly are undervalued on solid grounds.