Pinnacle West Capital Corporation (PNW) is a utility holding company that principally serves as the parent of Arizona Public Service, Arizona’s largest and longest-serving electric utility. With corporate roots dating back to over 125 years ago, Pinnacle West is now a $9 billion (by market cap) utility whopper that serves more than 1 million customers.

The company’s one reportable segment is its regulated electricity segment, which consists of traditional regulated retail and wholesale electricity businesses engaged in electricity generation, transmission, and distribution. Residential customers accounted for 50% of FY 2020 electric revenue, while industrial and commercial customers accounted for 49%. Other revenue occurred through wholesale, transmission for others, and miscellaneous customers. APS is vertically integrated, providing retail or wholesale electric service to almost the entire state of Arizona. That is, except for the metro Tucson area and about half of the metro Phoenix area. Fuel sources for APS for 2020 were as follows: gas, 28%; nuclear, 23%; demand-side management, 16%; coal, 14%; renewables, 11%; and purchased power, 8%. A significant portion of the company’s energy mix comes from clean resources.

Moreover, they’ve announced a plan to deliver 100% clean, carbon-free electricity by 2050. The investment thesis regarding a utility business like Pinnacle West is very straightforward. In a modern-day society that quite simply cannot function without reliable access to power, Pinnacle West provides a service that practically sells itself. They have captive customers that really can’t live without the service. This inherent need creates unflinching demand and a built-in profit source. That profit, of course, leads to dividends. And as more people move to Arizona and demand power at higher prices, you get higher profit and more dividends. CFRA rates PNW as a 4-star “BUY”, with a 12-month target price of $92.00. We’re all in the same ballpark. Averaging the three numbers out gives us a final valuation of $89.05, which would indicate the stock is possibly 7% undervalued.

Bottom line: Pinnacle West Capital Corporation (PNW) is a well-rounded utility business that’s situated in one of the best markets in the United States. It’s an appealing business operating in an appealing market, and it’s trading for an appealing valuation. With a market-smashing 4% yield, inflation-beating dividend growth, a decade straight of dividend increases, and the potential that shares are 7% undervalued, this is one of my better current ideas for dividend growth investors aiming for yield.

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