Utilities Power Up as AI Boom Fuels Electricity Demand
The utility sector has long been viewed as a defensive investment due to its stable earnings and reliable dividend income. However, the AI boom has changed this narrative as hyperscalers such as Microsoft (MSFT), Alphabet (GOOG) (GOOGL), Amazon (AMZN), and Meta Platforms (META) build AI data centers, leading to a surge in electricity demand.
According to Morningstar analysts, electricity demand from data centers is expected to quadruple by 2030 and increase sixfold by 2035. Data centers are projected to contribute an increasingly large share of utilities' earnings growth, with some utilities planning to spend massive sums on grid upgrades and transmission infrastructure.
The AI boom has already started showing up in earnings, with most utility companies beating Wall Street's earnings expectations in the latest quarter. The State Street Utilities Select Sector SPDR ETF (XLU) is a low-cost way to gain diversified exposure to large U.S. utility companies, offering a dividend yield of 2.71% and average annual earnings growth of about 9.7% over the next three to five years.
DTE Energy (DTE) could be a compelling choice for individual investors due to its long-term operating EPS growth rate target of 6% to 8% through 2030, with potential to exceed 8% if it secures a third hyperscaler data center customer later this year. The stock trades at a forward adjusted P/E of 18.38x, roughly in line with the sector median and its five-year average.