Avista Stock: Growth and Revenue in the Renewable Energy Sector (NYSE:AVA)

Entry

Public utilities have been out of favor for some time now. In a recent article, I looked at another utility with a growing renewable energy portfolio and outlined why I believe Northland Power (NPI:CA)) was a compelling buy in this space. Today I’ll be taking a look at a smaller company, Avista (NYSE: AVA) and emphasize why I am positive about this name. While the long-term thesis for renewables is the same, Avista in particular has seen margin and ROE growth, and the interest rate base should generate incremental earnings per share growth over time. With a strong balance sheet and safe dividend, Avista is an attractive investment in the utilities sector.

Informations about company

Avista is primarily a regulated utility company with interests in regulated utility operations in the Pacific Northwest where it distributes electric power and broadcast to eastern Washington and northern Idaho. In addition, it also distributes natural gas in Oregon and has electricity generation facilities in Washington, Idaho, Oregon and Montana. Avista also provides electricity to a small number of customers in Montana. Finally through your own auxiliaryAlaska Energy and Resources Company, Avista provides retail electric services to the City and Borough of Juneau.

One reason to like Avista is its renewable energy business. Of the total activity, 48% is hydropower, 9% is wind energy and 2% is biomass. But the company also has 33% natural gas and 8% coal, providing some diversification. In terms of generation properties, Avista has a current hydropower capacity of 1,049 MW and a thermal capacity of 860 MW.

Avista stock has underperformed over the past year, delivering a total return of -8.1% compared to the S&P500’s return of +27.2%. With a dividend yield of 5.3%, the decline was mitigated by dividend payments to shareholders. Additionally, Avista’s negative total return over the last twelve months also lags the Utilities Index ETF (XLU) at +12.9%.

So why the weaker results? Avista, like most utilities, has come under pressure recently as higher interest rates to fight inflation weigh on utilities. Two effects are driving this trend.

First, utilities are generally leveraged companies that choose to take on debt because of the low return on assets generated by their facilities. They are able to use financial leverage because demand from electricity transmission and distribution is usually very stable and predictable, and cash flows do not vary greatly from year to year. When interest rates rise, the cost of debt on a refinance means that interest costs rise even though they often achieve the same income, so rising expenses compared to stable income have a net negative impact on them.

Second, when interest rates rise, it often becomes more attractive from an investor’s perspective to buy safer fixed income investments compared to buying utilities that are generally perceived as riskier (stocks). That being said, as rates rise, investors sell off utilities.

Finance and prospects

One of the reasons I like Avista (and think investors are underestimating the company) is its history of consistent dividend growth over time. Over the past 21 years, the company has paid increasing monthly dividends to shareholders; achievements quite rare in the commercial space. With a growing dividend, you’d expect the company to pay out almost all of its EPS as dividends, but with a payout ratio of 76%, the dividend appears to be well covered. This should provide some dividend insulation, as well as comfort for investors knowing that the company will likely be able to continue growing its dividend even if EPS remains flat for several years.

However, in my opinion, EPS will not remain unchanged. In fact, Avista has made it quite clear why this won’t be the case. Given capital spending of approximately half a billion annually, base rate growth should continue to increase at 5% through 2026 with high allowable ROE in the four geographies (10.4% in Washington, 9.4% in Idaho , 9.5% in Oregon and 11.5% in Alaska), particularly in Alaska, the regulatory environment is surprisingly favorable with multi-year interest plans that insulate the company’s cash flow.

We also see that the company has been proactive in maintaining its resources above requirements to meet demand, regardless of operating conditions. The average hourly load was 1,115 aMW in 2023, 1,142 aMW in 2022 and 1,113 aMW in 2021.

With a market capitalization of $2.84 billion, long-term debt of $2.60 billion and cash of $12 million, Avista’s implied enterprise value is approximately $5.42 billion. Debt to enterprise value at 48%, which is in line with the results of other companies. Trailing twelve-month EBITDA is $550 million, so total debt to EBITDA was 4.7x, down from a high of 6.3x two years ago (source: S&P Capital IQ). As leverage continues to decline as earnings continue to grow in 2026, leverage should decline somewhat, barring any new growth capex.

In the earnings call, management noted that it was able to leverage $83.7 million in tax-exempt bond financing at an interest rate of 3.875%, approximately 140 basis points below the taxable market level. These savings should also support EPS growth. Additionally, management does not anticipate issuing further debt during the year, but only issuing approximately $70 million of equity later in the year to fund capital expenditures.

Valuation and summary

Looking at the 4 sell-side ratings on the Avista platform, there are 3 “hold” ratings and only 1 “buy” rating. The average price target is $40.00, representing an upside of approximately 10.6%, excluding the 5.3% dividend yield. Given the potential for a total return of 15.8% next year despite most ratings remaining, analysts actually see an advantage for Avista.

Avista is trading at 9.9x EV/EBITDA and 14.8x P/E (or 14.5x forward earnings) (source: S&P Capital IQ). Compared to peers, it is trading at a premium of 1 turnover in terms of both EBITDA and profits, so the company is roughly at the same level as the peer group.

However, when comparing the company to its historical P/E, the company is trading at a discount of over 5x compared to the historical ten-year average P/E of 20.1x P/E. In my opinion, this is probably due to the interest rate environment that has knocked out other competitors.

But if history was any indication, it was a great time to shop this deal because Avista has rarely been this cheap. In my opinion, the current valuation gives investors a chance to buy discounted shares. With rate base growth, a growing renewables portfolio, strong financial performance, and a balance sheet that provides the company with flexibility, I believe Avista offers a combination of growth and earnings. Weaknesses remain in the sector and may persist for some time until sentiment changes, but I believe that as the company continues to execute on its growth plans and capitalize on its diversified energy portfolio, shareholders can benefit from both capital growth and and consistently generating income, especially given its history of consistent dividend growth. I’m optimistic about Avista’s prospects and will be adding to the stock.