NiSource Raises Outlook for 2023, Remains a Top Pick in Utilities Sector

We are reaffirming our $32 fair value estimate for NiSource NI after the company announced $1.47 in operating earnings per share for 2022, up 7% from 2021. Results were in line with our expectations. We are reaffirming our narrow moat and stable moat trend ratings.

NiSource is the most undervalued utilities stock in our coverage, trading at a 16% discount to our fair value estimate as of Feb. 22. We think it has better regulation and more long-term investment opportunities than most other utilities relative to its size. The stock’s 3.7% dividend yield and above-average growth relative to its peers suggests total returns should top most utilities’ during the next five years.

Management reaffirmed its 6%-8% annual earnings-growth rate target through 2027 and raised its 2023 EPS guidance range to $1.54-$1.60, implying another year of 7% earnings growth. This is now in line with our outlook. We already had been forecasting 2023 earnings at the high end of management’s previous range.

Earnings growth is translating into dividend growth, as we expect. NiSource’s board recently raised the dividend 6% to $1.00 per share annualized for 2023. We think NiSource has enough financial flexibility and constructive rate regulation to maintain a 60%-70% payout ratio, higher than other utilities. This enhances cash returns for shareholders.

NiSource’s key growth factors remain the pace of renewable energy investments and the outcome of Indiana electric rate proceedings this year. We continue to assume NiSource invests $8 billion in 2023-25 with that pace accelerating beyond 2025.

We think an electric rate case settlement will expedite NiSource’s plan to sell 19.9% of its Indiana utility, NIPSCO, this year, as management announced in November.

Elliott Management, which has been active in the utilities sector during the last decade, made NiSource one of its top six new buys and the only utilities holding during the fourth quarter, according to recent fund filings.