Roger S. Conrad

It’s survival of the fittest in the communications sector. And as rising competition, surging capital spending and tough regulation shrink free cash flow, the wave of dividend cuts is hitting all but the largest and strongest players.

Cheap to mine, easy to burn and abundant almost everywhere: It’s easy to see why coal became the primary fuel for a century plus of global electrification. In fact, up until very recently, demand growth was actually accelerating. 

Now more than ever, it’s a stock picker’s market for utilities and essential services.

Last month, the Dow Jones Utility Average basically ran in place. But top-performer AES Corp (NYSE: AES) returned 10 percent, while the biggest loser Public Service Enterprise Group (NYSE: PEG) shed 5 percent.

The difference maker was investor expectations. AES beat a relatively low bar with third quarter earnings and updated guidance. Public Service failed a somewhat higher one, despite another solid performance at its core New Jersey utility.

AES is also a leading global adopter of renewable energy technology, including battery storage. And its 90 percent two-year total return—70 points better than the DJUA—was in large part simply closing the gap with sector leaders like NextEra Energy (NYSE: NEE).

Roger Conrad will host an online chat for Conrad's Utility Investor subscribers on Nov. 21, 2019 at 2 PM Eastern time.

It was another strong quarter for the nearly 200 essential service companies in our Utility Report Card coverage universe. Of the 95 percent or so reporting so far, only a handful of small telecoms failed to demonstrate underlying business strength.

My number one rule in any environment is to avoid stocks and bonds of companies with weakening underlying businesses. If things are going poorly now, how bad will they get when the economy really slows and/or the cost of capital rises?

Aggressive Hoding Suburban Propane Partners (NYSE: SPH) has yet to report its fiscal fourth quarter. But each of the 38 other CUI Portfolio recommendations reported numbers that either met or beat management’s previous guidance.

Roughly four years ago, Atlantica Yield’s (NSDQ: AY) largest shareholder Abengoa SA (Spain: ABG) filed bankruptcy. The move restricted cash flows from facilities the pair held in common. And as a result, the yieldco was forced to suspend dividends until September 2016, when it resumed at a quarterly rate that was barely one-third the former payout.

Sustainability worries about North American shale oil and gas production, governance concerns and an ugly half-decade of dividend cuts convinced many investors to flee the midstream energy sector and never look back.

US/China trade deal optimism has gained steam this month. That’s pushed up the yield on the 10-year Treasury bond to its highest level since late July. And the result has been a mini-sector rotation out of many dividend-paying stocks.