3 Utility Stocks Built for the Coming AI Power Crunch

Artificial intelligence (AI) data centers are popping up everywhere, to the point where it's becoming a source of political backlash. Yet while the debate over where to build data centers rages on, one thing remains very certain.

As AI data centers proliferate, electricity demand will continue to rise as well. While this trend could bode well for utility stocks across the board, it could serve as a strong long-term catalyst for the following three electric utility stocks in particular: Constellation Energy Group (NASDAQ: CEG), Entergy (NYSE: ETR), and NextEra Energy (NYSE: NEE).

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Constellation Energy: Melting up on AI growth

Spun off from utilities giant Exelon in 2022, Constellation Energy Group provides electricity and natural gas to a variety of customers, including regulated utility companies. What makes Constellation especially interesting is its high exposure to nuclear power.

That is, the company owns and operates 15 nuclear power plants, primarily in the Midwest and Mid-Atlantic. In the past, nuclear power has been a controversial industry, but in recent years, public and private stakeholders have recognized nuclear power's value as a scalable, low-carbon energy source, with nuclear power plants a viable "green" alternative to coal- and natural gas-fired power plants.

When it comes to the AI data center trend, Constellation benefits in two ways. First, greater demand from hyperscalers translates into greater demand from Constellation's regulated utility customers. Second, as these same hyperscalers begin entering into direct power deals with independent power generation companies, Constellation has secured long-term deals with companies like Meta Platforms.

Thanks to its AI-related catalyst, analysts anticipate Constellation's earnings to grow by nearly 25% this year, and by nearly 16% in 2027. This double-digit earnings growth could help sustain Constellation's low-20s forward earnings multiple, with shares continuing to rise in line with earnings growth. Alongside appreciation potential, don't discount Constellation's strengths as a dividend stock.

With a forward yield of around 0.7%, Constellation certainly isn't one of the high-yield dividend stocks, but its quarterly payouts have increased by over threefold since the company went public in 2022.

Entergy is well positioned to benefit from the boom

Entergy, the electric utility for much of the Gulf region, has relatively large exposure to the AI data center boom. That's because it is the utility set to supply power to Meta's $50 billion data center currently under construction in northeast Louisiana.

The utility also stands to benefit from other large-scale data center projects in the region, including Amazon's numerous data center projects in Mississippi. While Meta and Amazon are both agreeing to fund the energy infrastructure required for these projects, Entergy needs to raise billions in capital to expand its power generation capacity.

A portion of this capital is coming from dilutive share sales. Earlier this year, Entergy disclosed plans to raise up to $4.4 billion in equity through 2029, of which it raised $2.2 billion during a secondary offering completed in May. However, compared to Entergy's $53 billion market cap, this represents relatively modest share dilution.

Moreover, while this catalyst may be capital-intensive, the payoff for Entergy could be massive. Long-term forecasts call for earnings to rise by nearly 40% between now and 2029. Entergy also has a 2.2% forward dividend yield and has raised payouts at a steady annualized 5.5% clip for the past five years.

With its upcoming merger, NextEra is doubling down on the trend

After surging and sinking amid the "clean energy" trend in the early 2020s, NextEra Energy has since bounced back, driven by the AI data center trend. Besides being the parent company of Florida Power & Light, NextEra also owns renewable power generation assets located across the United States.

That's not all. With its recently announced plan to merge with Dominion Energy, NextEra is materially increasing its exposure to the trend. Dominion Energy is the local utility company for northern Virginia, commonly dubbed "data center alley" for its high concentration of data centers.

As Jefferies analyst Julien Dumoulin-Smith noted at the time of the announcement, NextEra's expertise, coupled with Dominion's assets, could lead to growth synergies. The company's management has already anticipated that the deal could produce annual adjusted earnings growth of at least 9% through 2032.

With the shares trading at a forward earnings multiple in the low 20s, a rerating could prove difficult, but long-term steady earnings growth could pave the way for solid gains in the years ahead. This upcoming deal could be a boon for dividend growth as well.

NextEra has over three decades of consecutive annual dividend growth under its belt. With the stock currently sporting a 2.8% forward dividend, long-term success with the Dominion merger could be what gets the stock to Dividend King status. Dividend Kings are stocks with over 50 years of consecutive earnings growth.

Thomas Niel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Constellation Energy, Entergy, Jefferies Financial Group, Meta Platforms, and NextEra Energy. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.