With a 4% Dividend Yield and Significant Growth Potential, This Stock Is a Buy

WEC Energy Group WEC got some good news last month: Microsoft intends to significantly expand its data center campus in southeastern Wisconsin, which is the utility’s territory. We think this narrow-moat company is one of the best-positioned utilities to benefit from AI-driven data center growth—and the stock is trading at a big discount to our $96 fair value estimate. This attractive dividend stock appears on our list of the Best Utilities Stocks to Buy; it’s also among Morningstar chief US market strategist Dave Sekera’s 5 Undervalued Stocks to Buy as Their Stories Play Out.

WEC Energy is the largest Midwest utility. Nearly 75% of its earnings comes from areas with constructive state and federal regulation. Its regulated-like commercial renewable energy business accounts for the remainder. In Wisconsin, the company enjoys rates based on two-year forward test years and an earnings-sharing mechanism over its allowed return on equity. Average allowed ROE tops 9.8% at WEC’s subsidiaries in the state and is consistently above peers’. The company’s most recent rate outcome is consistent with our view that Wisconsin remains a very constructive regulatory environment for utilities. WEC recently increased its capital investment program in large part to support estimated 4.5%-5.0% annual electricity demand growth from 2026 to 2028. New demand is coming from significant economic development in southeastern Wisconsin, particularly data centers. The company will increase investments in renewable energy, natural gas generation, and transmission.

Key Morningstar Metrics for WEC Energy

• Fair Value Estimate: $96
• Star Rating: 4 Stars
• Economic Moat Rating: Narrow
• Uncertainty Rating: Low

Economic Moat Rating

Service territory monopolies and efficient scale advantages are the primary sources of an economic moat for regulated utilities like WEC Energy. State and federal regulators typically grant regulated utilities exclusive rights to charge customers rates that allow the utilities to earn a fair return on and return of the capital they invest to build, operate, and maintain their distribution networks. In exchange for regulated utilities’ service territory monopolies, state and federal regulators set returns at levels that aim to minimize customer costs while offering fair returns for capital providers. This implicit contract between regulators and capital providers should, on balance, allow regulated utilities to outearn their costs of capital.

Read more about WEC Energy’s moat rating.

Fair Value Estimate for WEC Energy Stock

Our fair value estimate is $96 per share. We expect annual earnings growth over five years at the high end of management’s 6.5%-7% guidance range. We forecast stable allowed returns on equity and assume consistent regulatory treatment at WEC’s Midwest utilities. We expect constructive outcomes in the recent rate case filings in Wisconsin. We include $23.7 billion in capital expenditures through our five-year forecast at the company’s regulated operations. We forecast completion of investments in natural gas storage, natural gas power generation in Michigan, Illinois modernization projects, and renewable energy. In our discounted cash flow valuation, we use a 5.9% cost of capital based on a 7.5% cost of equity.

Read more about WEC Energy’s fair value estimate.

Risk and Uncertainty

WEC’s ability to obtain rate adjustments depends on maintaining constructive relations with regulators. If regulatory relations weaken, regulators could cut the utility’s allowed return, resulting in earnings and cash flow pressure. Another potential risk is that electricity or natural gas demand could fall, requiring larger rate increases to continue earning allowed returns. The company has a significant ongoing development program that is subject to potential cost overruns and political and regulatory risk. Tightening environmental compliance regulations could require significant capital investment or added operating costs, which could have uncertain cost recovery through traditional regulated rates.

Read more about WEC Energy’s risk and uncertainty.

WEC Energy Bulls Say

• Wisconsin, which represent nearly two thirds of WEC’s business, is a favorable regulatory environment with a forward-looking test year and earned returns above the national average.
• The company’s capital investment plans support our forecast for earnings at the high end of management’s 6.5%-7% guidance range.
• WEC has numerous growth opportunities across its operating subsidiaries.

WEC Energy Bears Say

• WEC’s large investment plan increases regulatory risk.
• Regional economic opportunities might not pan out, lowering long-term growth opportunities.
• As with all regulated utilities, rising interest rates will raise financing costs and could make the dividend less attractive for income investors.

This article was compiled by Susan Dziubinski and Sylvia Hauser.