Bernstein in a note published Thursday reaffirmed a positive stance on European utilities, saying that a roughly 5% premium to the sector's long-term valuation is justified by an expected surge in electricity network investment and by faster decarbonization dynamics in the wake of the Iran war.
The brokerage highlighted that the utilities sector has delivered a total shareholder return of 14.6% year-to-date, outperforming the Eurostoxx 600 by about 900 basis points. Since the outbreak of the Iranian crisis on Feb. 28, Bernstein noted the sector has slightly lagged the broader market, underperforming by roughly 20 basis points.
Bernstein framed its argument in part around policy momentum, citing a statement from the European Commission President: "We must accelerate the shift to homegrown, clean energies. This will give us energy independence and security, and mean we are better able to weather geopolitical storms," a quote the brokerage used to illustrate a regulatory tailwind for the sector.
Valuation metrics show the sector's spot price-to-earnings multiple at 16.2x, compared with a long-term average of 13.8x. By contrast, the broader market trades at 15.4x versus its long-term average of 14.4x. Bernstein contends that the premium for utilities is supported by fundamental expectations for earnings and shareholder returns.
Specifically, sector earnings per share are forecast to grow at a compound annual rate of 7.1% from fiscal year 2026 through fiscal year 2029, while dividend yields are expected to rise from 3.9% in FY26 to 4.5% by FY29.
Underlying the forecast is a substantial increase in capital expenditure. Bernstein projects annual sector capex to climb from 58 billion in 2020 to 117 billion by 2030, representing around a 7% compound annual growth rate. Electricity networks are singled out as expanding even faster, with capex on grids rising at roughly a 14% annual pace and increasing their share of total sector capex from about 32% in 2020 to 59% by 2030.
The brokerage also expects aggregate adjusted net income for the sector cohort to grow from 39 billion in 2025 to 48 billion in 2028, a projected CAGR of 6.9% over that interval.
Performance has varied across sub-sectors since the crisis. Renewables have been the strongest area, up roughly 27% year-to-date and about 6% since the conflict began. Electricity grid operators have posted a mixed picture - gaining around 13% year-to-date but falling roughly 6% since the war started. Integrated electricity companies have declined about 1% since the onset of the conflict.
At the individual stock level, Bernstein highlighted Vestas as the top performer since the crisis, up about 19%, followed by Endesa at approximately 10%. Among the weaker performers, UK-regulated networks were most heavily hit, with Pennon down about 12% and National Grid off around 10%.
Bernstein's top picks within the sector, each rated "outperform," are listed with price targets as follows:
- SSE - 30.40
- EDP - 5.30
- National Grid - 14.50
- EDPR - 15.20
- Veolia - 40.00
- Severn Trent - 33.70
The brokerage's analysis links higher prospective returns to large and accelerating investment in networks and a policy environment prioritizing domestic clean energy, while also documenting divergence between sub-sectors and individual names since geopolitical tensions escalated.