Roger S. Conrad

Economics not politics are what ultimately drive investor returns. And as this month’s Utility Report Card comments show, Q3 results and guidance are quite strong for the vast majority of the nearly 200 essential services companies we track.

The utilities sector also continues to get a lift from M&A. Since the October feature article went to post, two all-cash deals have been announced. One of them involves Conservative focus stock Avangrid Inc (NYSE: AGR). The other is the nearly 60 percent premium offer for one of last month’s picks Alaska Communications (NSDQ: ALSK).

Back in January, I added unregulated electricity generator and retailer Vistra Energy (NYSE: VST) to the Aggressive Holdings for three reasons.

First, the company is a cash machine, consistently shaving costs from its business and debt from its balance sheet while gaining market share with acquisitions and “greening” its generation fleet. Second, its shares traded at a major valuation gap I thought would close as the US economy strengthened. And third, there was a growing possibility of a takeover, potentially by private capital.

Conservative Holding Avangrid Inc (NYSE: AGR) hasn’t raised its dividend since July 2018. Not surprisingly, its returns have since lagged the Dow Jones Utility Average by more than 25 percentage points.

Two major developments in the past month promise a favorable reversal of fortune, even as shares have dropped roughly 10 percent to an attractive entry point.

Economics not politics drive investment returns. Don’t get me wrong. Our Portfolio stocks came out very well in the recent election as businesses, future regulatory relations being the key concern.

The renewable energy focus of our electricity stocks is tailor-made for a new White House that will if anything try to speed up America’s ongoing energy transition. And the offshore wind stocks highlighted in the feature article are likely to be the next sector picks to pop, following example of contract generators like Brookfield Renewable Energy Partners (TSX: BEP-U, NYSE: BEP).

Energy Transfer LP (NYSE: ET) and Infraestructura Energetica (Mexico: IENOVA, OTC: IENVF) are the 25^th and 26^th dividend cutters from our Utility Report Card coverage universe in calendar 2020.

The silver lining is management’s decisions were clearly made for preference, rather than of necessity. That’s encouraging for both companies as well as others we track, with the result our Endangered Dividends List is the shortest it’s been all year.

Roger Conrad will host an online chat for Conrad's Utility Investor subscribers on Nov. 17, 2020 at 2 PM Eastern time.

The top two companies that dominate this essential service industry have combined market capitalization of $440 billion and annual revenue of $300 billion plus, but still trade for an average of just 10 times expected 2020 earnings. They clearly suffer from the burden of low expectations.

The first three Portfolio electric utilities have announced Q3 results and delivered guidance,  and the common thread for all three companies is they ignited robust underlying earnings growth by deploying new renewable energy generating capacity, despite pandemic-related pressures

Elections always have consequences. They’re just rarely what investors think they will be—and almost never what’s declared beforehand in popular investment media.