Roger S. Conrad

For the 10^th time in the post-World War II period, the S&P Utilities Index has dropped by more than -20 percent from its previous all-time high—reached in September 2022. Last month’s feature article highlighted key headwinds facing utilities and essential service stocks this year—and reasons why I didn’t think we’d seen the worst of this now more than year-old downturn.

With money market funds and CDs paying 5 percent plus, many investors are asking how dividend stocks can compete on yield.

The far more relevant question: How they stack up on total return, over a meaningful period of time. And on this score, cash alternatives don’t come close to matching up.

Not since 1999 have essential services sectors lagged market averages by this great a margin. Year to date, the Dow Jones Utility Average has dropped by nearly -10 percent. The S&P 500, in contrast, is ahead by 16 percent. And despite losing some momentum recently, the Nasdaq 100 is up better than 40 percent.

Adding water and wastewater customers by acquiring cash-poor systems on the cheap, then upgrading systems under reliable rate plans: That’s been the formula for Essential Utilities’ (NYSE: WTRG) reliable 7 to 10 percent annual earnings and dividend growth since the early 1990s, when it was known as Philadelphia Suburban.

In the short-term, the stock market is basically a popularity contest. Investors large and small chase the upside momentum of the hottest themes. Concepts like what a business is actually worth are given lip service at best. And every once in a while, things run so far in one direction that even safe, generous dividends lose their luster. But if you’ve invested for more than a cycle or two, you’ve by now learned the long-term market is more of a weighing machine. And outperforming businesses that gain strength and size over time are eventually rewarded with higher stock prices.

Hawaiian Electric Industries (NYSE: HE) suspended its dividend last month, saving roughly $158 million if continued over the next year. That’s a key piece of the utility’s defense against a wave of lawsuits resulting from Maui’s devastating wildfire, which wiped out the town of Lahaina and killed upwards of 100 people. Management has also drawn down most of the company’s $375 million in credit lines. And it’s considering restructuring moves including spinning out its American Savings Bank unit.

Nine times since the end of World War II, the S&P Utilities Index has dropped by more than -20 percent from its previous high. The most recent occurred over the space of just one month: February 2020 to March 2020 in the wake of the pandemic panic. Over the following 30 months or so, utilities generally moved higher greatly outperforming the broader stock market for most of 2022. But since then, headwinds have generally overwhelmed tailwinds, though the S&P Utilities to date has sustained less damage than any of the periods highlighted in my table “Utilities’ Post-War Ups and Downs.”