What industry's stocks have hit all-time highs this year, offer deregulation and consolidation plays and look intriguing to investors?
None other than boring old electric utilities. This relatively staid investment choice favored by widows and orphans for generations has lately become the breakfast of champions.Worried about Asia? You can, for the most part, forget all about it with these stocks. Think the market's too volatile and corporate earnings too unpredictable? These equities virtually cry out with a chant of "defense, defense."
"Electric utility stocks have been selling at a 35 percent discount to the Standard & Poor's 500 and their average dividend yield of nearly 5 percent compares to 1.6 percent for the S&P," explained Paul Rissman, co-portfolio manager of the Alliance Utility Income Fund. "Add the facts that their earnings growth should be in line with the S&P, that they have zilch international exposure and they're fundamentally attractive."
Earnings of electric utilities tend to be stable and may even be a bit better than usual this year because forecasts are calling for a hot summer (due, some say, to an El Nino effect), he added.
Electric utility stock prices peaked in September 1993 and didn't break through that level until the end of last year. They rose again in March but then retraced their steps, and have lately risen a tad higher than they were at their 1993 peak.
"Helping electric utilities are interest rates that are coming down and are relatively stable, as well as the removal of uncertainty as states finally approve their deregulation plans," added John Schniedwind, co-portfolio manager of the American Century Utilities Fund. "Furthermore, electric utilities have been beaten up badly the last few years and people are recognizing there are opportunities."
The electric utilities group had lagged the overall market earlier this year, making recent gains more impressive. Yet not everyone's so sure it can maintain its upward movement. In addition, it's worth noting that some electric utilities have cut their dividend yields recently and more will probably do so in the future.
"I agree that electric utilities have been offering a defensive play in a volatile market, but I don't think the sentiment is sustainable," said Larry Alberts, electric utilities analyst with American Express Financial Advisors in Minneapolis. "A lot of portfolio managers want to try to lock in their gains during a quarter, and the utility sector has often been a safe haven for them, so utilities tend to perform fairly well in the third month of a calendar year."
These days, each electric utility has a different story. For example, stock of CMS Energy (Consumers Power of Michigan) is recommended by Alberts and Rissman because of its good state regulatory situation and 10 percent long-term earnings growth prospects. It's also doing more with its non-regulated businesses than any other utility, with projects in places like Morocco, Australia and Chile.
New Century, an electric and gas utility in Colorado, is attractive because a large foreign investor coming into the U.S. market might be interested in acquiring it at some point, speculated Alberts. Duke Energy is an Alberts pick because of its high single-digit earnings growth and international projects. Two electric utilities favored by Rissman because of friendly state regulators and fast-growing populations are FPL Inc. (Florida Power & Light) and Arizona's Pinnacle West Capital. Energy East Corp. (New York State Electric & Gas) is attractive, Rissman believes, not only because state regulators let it restructure long-term contracts, but because it could be a takeover target.
In addition, Texas Utilities and Illinova are favored by Schniedwind for their reasonable stock prices and earnings growth prospects.
Top-performing utilities funds (containing other utilities in addition to electrical) over the past 12 months in total return, according to Lipper Analytical Services, were:
-Fidelity Advisory Utilities Growth Fund, Boston; $3.2 billion in assets; four different share classes; minimum initial investment $2,500; up 42 percent.
-Alliance Utility Income Fund, New York; $31 million; four share classes; $250 minimum; up 36.27 percent.
-American Century Utilities Fund, Kansas City; $221 million; "no-load" (no initial sales charge); $2,500 minimum; up 36 percent.
-Fidelity Utilities Fund, Boston; $1.8 million; no-load; $2,500 minimum; up 35.96 percent.
-Dean Witter Global Utilities Fund, New York; $431 million; four share classes; up 32.85 percent.
"Electric utility stocks aren't as safe as they used to be because of deregulation but are a lot safer than a lot of other things," concluded Rissman.