Electric utilities. That's the ticket.
They're defensive, recession-proof, high-yielding and trading at 52-week lows. Just the sort of safe passage you need in a stock market that's being rocked day in and day out by volatility.But before you get that ticket punched just yet, realize that electric utilities don't always mean a pleasure cruise.
They are vulnerable to interest rates and inflation. State regulators are getting tougher with rate requests.
Federal acid rain legislation will prove costly to some companies.
Dividends can be omitted.
"Electric utilities used to be a nice, clear, homogeneous group, but now you must pick stocks as you would with any industry," advised Anne Prebensen, vice president with Donaldson Lufkin & Jenrette Securities. "They still should be overweighted in a portfolio right now because of their many positives, but concerns about the economy simply can't be overlooked."
Following the October 1987 stock market crash, investors flocked to electric utilities. Thus far in 1990, despite market volatility, there hasn't been such a run. Performance of the electric utilities group is down 14 percent on the year, though it has outperformed the overall market by about 1.5 percent since the Middle East crisis.
"If you hold electrical utilities long-term, they are a fine investment which provides strong yield with some price appreciation," said Doris Kelley-Alston, vice president with Merrill Lynch & Co.
"Until people are comfortable about where interest rates are headed, however, there won't be a resounding `yes' to electric utilities, though there are selective choices."
Interest rates are important not only because utilities borrow money but because yields of competing instruments such as money-market funds and bonds look better when rates are high.
A recession can hurt somewhat because commercial customers use less electricity.
Rising oil prices hurt utilities using a lot of oil, while acid rain legislation to require scrubbers and other treatment will squeeze those using a lot of coal.
"There is always interest in electric utilities, especially among older investors, who, after all, have the most money to invest," observed John Slatter, portfolio strategist with Prescott Ball & Turben. "Your dividend plus growth can equal a total return of 10 percent a year."
Just remember that the higher the yield, the greater the risk.
Among high-quality, lower-yielding electric utilities, Kelley-Alston recommends Wisconsin Energy Corp. (6.5 percent dividend yield), a strong company likely to outperform the industry in dividend growth, and Duke Power (6 percent yield), a diversified firm deriving two-thirds of earnings from non-utility ventures.
Moving higher in yield and risk, she suggests Long Island Lighting Co. (8.3 percent yield), which should reap benefits from an increasing number of consumers converting from oil heat; Public Service Enterprise (8.9 percent yield), a diversified utility with a secure dividend; and Houston Industries (9.3 percent yield), its two nuclear plants now completed and strong cash flow coming from cable television operations.
Meanwhile, Prebensen of Donaldson Lufkin & Jenrette favors high-quality choices SCEcorp. (7.4 percent yield); Detroit Edison (6.7 yield); and General Public Utilities (6.3 percent yield). Riskier but likely to maintain its dividend, she believes, is Commonwealth Edison (9.8 percent yield).
Much riskier picks, with no dividends, are Gulf States Utilities and Illinois Power.
Slatter of Prescott Ball & Turben sticks with high-quality selections such as LG&E Energy Corp. (7.8 percent yield), Iowa Southern Inc. (7.5 percent yield) and Florida Progress (7.7 percent yield). Like Kelley-Alston, he recommends Wisconsin Energy Corp.
While he won't recommend some electric utilities that have eliminated their dividends, among them Pinnacle West Capital, Tucson Electric Power and Gulf States Utilities, Slatter admits he may be taking too conservative a course.