Whenever there is economic or political turmoil, electric utility stocks shine brightly.
Historically, these defensive investments never fall as much in down stock markets as most other groups. For example, during the past12 months, when the Standard & Poor's 500 was down more than 10 percent, electric utilities as a group slipped a more modest 7 percent."In recession, electric utilities are a safe haven offering dividend yields averaging around 7.4 percent, compared to 3.4 percent for the average stock," said William Tilles, analyst with Dean Witter Reynolds Inc. "Consumers use electricity whether there's recession or not, and quality utility stocks appreciate in price over time."
Keep in mind, however, that corporate users of electricity may well cut back their use if they've had to scale back business efforts for economic reasons. That can obviously affect an electric utility's income. Furthermore, investors have been bidding up the prices of some of these stocks. Such equities are not totally without risk, either, and one should be wary of extremely high yields.
"While they should be at least a portion of an individual's portfolio, electric utilities are not cheap right now, and their yields aren't as high as they were a decade ago," cautioned John Slatter, analyst with Prescott Ball & Turben. "Also remember that buying a really high-yielding utility can spell disaster, for 30 utilities have had to cut their dividends and some have eliminated them altogether."
Bearing all of that in mind, there still are positives.
"Nobody knows how deep the current recession will be, but the more negative the situation becomes, the better utilities look," observed Ken Knutel, investment strategist with Kemper Financial Corp. "They also are interest-rate sensitive, doing well when rates are falling."
Kemper's utilities analyst, Ann Logue, recommends carefully choosing electric utilities based on the following criteria:
- A strong service area, with the Midwest looking particularly strong right now.
- Little exposure to nuclear construction spending.
- No need to comply with acid rain legislation by installing special scrubbers.
- Good success in managing non-regulatory businesses outside their regular electric utility operations.
Among individual stocks, both Slatter and Logue recommend Wisconsin Energy Corp. (6 percent dividend yield) due to its strong balance sheet, mature nuclear plants and that state's good regulatory climate.
Another Slatter choice is Northern States Power (7.1 percent dividend yield), a quality company with a strong balance sheet, good earnings and a history of dividend boosts. Meanwhile, Kentucky Utilities (7.2 percent dividend yield) has the lowest rates of any utility east of the Mississippi River, solid earnings and no nuclear power. While it will have to put in scrubbers, rate increases should cover that cost.
Also selected by Logue was Northern Indiana Public Service (9.1 percent dividend yield), which has a growing service area and no nuclear power. It is leasing a scrubber system.
Among high-quality electric utilities, Tilles recommends the stock of General Public Utilities (5.8 percent yield) because it offers above-average dividend growth, with the next likely in April, and has "virtually completed the cleaning up of Three-Mile Island." From higher-yielding choices, he suggests New York State Electric & Gas (8.4 percent yield), a utility with some nuclear which has solid prospects.
In special situations, he likes Pinnacle West Capital (no dividend likely for at least two years), the parent company of Arizona Public Service Co., which has resolved some savings and loan problems and should benefit from substantial utility earnings. On the other hand, Tilles recommends the sale of the stock of Tucson Electric Power, a company with some remote prospects of bankruptcy, which will have negative earnings until it receives significant rate relief.
The Value Line Investment Survey rates the following states "below average" in regulatory climate: Alabama, Arkansas, Illinois, Iowa, Louisiana, Massachusetts, Michigan, Mississippi, New York, North Dakota and West Virginia. States ranked "above average" are Florida, Missouri, New Mexico, Washington and Wisconsin. The remaining states are ranked "average."