Roger S. Conrad

The Dow Jones Utility Average outperformed the S&P 500 by more than 20 percentage points in 2022. And it did so despite the yield on the benchmark 10-year Treasury note rising from barely 1.5 percent to nearly 4 percent—no doubt baffling investors who consider utilities “bond alternatives.” As my table “Best and Worst of 2022” makes clear, however, there were some pretty dramatic divergences of share price performance inside the headline numbers. That’s clear from the 206.6 percentage point difference between the top and bottom performer of my Conrad’s Utility Investor coverage universe. And even a brief glance at this month’s Utility Report Card comments shows total returns are all over the map for the rest as well.

There are just three trading days to go in 2022. And barring a real last minute tsunami, this year will go down as a decidedly flat overall for the Conrad’s Utility Investor portfolios and Utility Report Card coverage universe.

Sticking to long-term guidance in face of severe near-term headwinds: That’s the difference maker for investor returns in utilities and essential services stocks this year. And it’s certain to be once again in 2023.

The greatest challenge is the most dramatic increase in interest rates since the 1980s. Debt is an indispensable pillar of financing for capital-intensive sectors like power, communications and water. And even solidly investment grade companies like WEC Energy (NYSE: WEC) have seen their cost of short-term debt increase as much as 350 basis points since the beginning of the year.

Europe’s unfolding energy crisis, rising interest rates and a heavy debt load: That accounts for elevated investor skepticism this year that Italy-based Enel SpA (Italy: ENEL, OTC: ENLAY) can hold to guidance of 10 to 13 percent earnings growth or even its generous dividend.

Being the first mover in a new technology means taking risks later adopters don’t. And Conservative Holding Southern Company (NYSE: SO) felt the pain of a $6 billion write off when its once-promising clean coal project in Mississippi failed in the previous decade.

Even if the stock and bond markets manage a year-end rally of historic proportions, 2022 will go down as one of the more challenging for investors in memory. But with basically three weeks left in the year, the Dow Jones Utility Average is still very much in the black.

The Endangered Dividends List has two new members this month: Algonquin Power & Utilities (TSX: AQN, NYSE: AQN) and Vodafone Group (London: VOD, NYSE: VOD).

For most of the past two decades, it’s been a sellers’ market for bonds and fixed income. Large institutions like pension funds have had literally no choice but to fill the bond portion of portfolios with whatever was for sale. And even when there’s been upward pressure on rates, financially strong companies have been able to wait for what’s been an inevitable return to better conditions—and the chance to issue new bonds at lower coupon rates.