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Wells Fargo is suggesting that the ‘out-of-favor’ utilities sector may be the next frontier for AI-driven investment gains, particularly due to their consistent dividend payouts.
Despite lagging the S&P 500’s performance, companies like Exelon and FirstEnergy are highlighted for their potential to benefit from AI-related infrastructure needs once regulatory clarity emerges, while also offering attractive dividend yields.
While the S&P 500's artificial intelligence-fueled rally has bypassed the utilities sector, Wells Fargo analysts suggest that overlooked utility stocks could be the next beneficiaries of this trend, especially given their attractive dividend yields. The sector has lagged the S&P 500 by approximately 3.3 percentage points year-to-date. Despite this underperformance, Wells Fargo recommends utilities for their diversification benefits and potential for future re-rating. The sector's current gains are 7.5% year-to-date, excluding dividends, compared to the S&P 500's 9.8%. Factors contributing to this lag include regulatory and policy risks, opposition to data center construction, and investors' focus on immediate opportunities rather than long-term AI-linked developments. Uncertainty surrounding utilities connected to the PJM Interconnection, a major regional grid operator, adds to the challenges, with upcoming regulatory discussions potentially leading to significant changes. However, Wells Fargo remains optimistic, anticipating that these overhangs will clear, leading to a re-rating of utility stocks. The bank highlighted specific companies poised to benefit from this clarity and AI growth, offering income above the market average.
"Buy the next wave of AI winners the (out of favor) eastern wires [companies] that will benefit from transmission and possible generation opportunities from AI once we get policy/regulatory clarity from FERC/PJM/PA," the bank advised.
Exelon, a Chicago-based utility, was identified as one such 'out of favor' name. Its shares have risen 7% year-to-date, and it offers a current dividend yield of 3.6%. The company recently reported first-quarter operating earnings that surpassed expectations and reaffirmed its full-year guidance. CEO Calvin Butler emphasized efforts to address supply costs and reliability challenges, noting the necessity of addressing generation shortages. Exelon is securing its data center pipeline through FERC-approved transmission security agreements, which have backed approximately $1 billion in collateral. Most analysts currently rate Exelon a 'hold,' with consensus price targets suggesting about 5% upside.
FirstEnergy, based in Ohio, is another utility Wells Fargo believes could benefit from regulatory clarity and AI opportunities. The company reaffirmed its 2026 core earnings forecast and reported a significant increase in contracted demand from data centers, with strong interest from hyperscalers and developers for additional power generation in West Virginia. FirstEnergy shares are up nearly 10% year-to-date, and the stock provides a dividend yield of 3.8%. A majority of analysts covering FirstEnergy recommend it as a 'buy' or 'strong buy,' with consensus price targets indicating around 7% upside.
Other utilities mentioned on Wells Fargo's list include PPL, which is up nearly 3% year-to-date and offers a 3.2% dividend yield, and Public Service Enterprise Group, which is down 1% this year but yields 3.4%.
"Buy the next wave of AI winners the (out of favor) eastern wires [companies] that will benefit from transmission and possible generation opportunities from AI once we get policy/regulatory clarity from FERC/PJM/PA," the bank advised.
Exelon, a Chicago-based utility, was identified as one such 'out of favor' name. Its shares have risen 7% year-to-date, and it offers a current dividend yield of 3.6%. The company recently reported first-quarter operating earnings that surpassed expectations and reaffirmed its full-year guidance. CEO Calvin Butler emphasized efforts to address supply costs and reliability challenges, noting the necessity of addressing generation shortages. Exelon is securing its data center pipeline through FERC-approved transmission security agreements, which have backed approximately $1 billion in collateral. Most analysts currently rate Exelon a 'hold,' with consensus price targets suggesting about 5% upside.
FirstEnergy, based in Ohio, is another utility Wells Fargo believes could benefit from regulatory clarity and AI opportunities. The company reaffirmed its 2026 core earnings forecast and reported a significant increase in contracted demand from data centers, with strong interest from hyperscalers and developers for additional power generation in West Virginia. FirstEnergy shares are up nearly 10% year-to-date, and the stock provides a dividend yield of 3.8%. A majority of analysts covering FirstEnergy recommend it as a 'buy' or 'strong buy,' with consensus price targets indicating around 7% upside.
Other utilities mentioned on Wells Fargo's list include PPL, which is up nearly 3% year-to-date and offers a 3.2% dividend yield, and Public Service Enterprise Group, which is down 1% this year but yields 3.4%.
