Roger S. Conrad

During the first nine months of 2024, 116 essential services companies tracked in the Utility Report Card raised dividends at least once. Eight reduced or eliminated their payouts, disproportionately from the telecom sector. Telephone and Data Systems (NYSE: TDS) cut its payout -79 percent. That reflects the proposed sale of wireless operations of its US Cellular Corp (NYSE: USM) affiliate to T-Mobile US (NSDQ: TMUS) for $4.4 billion.

In August 2023, I highlighted the communications sector in a feature piece titled “Telecom Has a Future, But Not Every Company Does.” My premise was communications is more essential than ever to a functioning world. And as more industries adopt artificial intelligence, it will only become more vital, even as total global penetration of smart phones tops 100 percent later this decade.

Not every big utility stock hit a 52-week high in the past month. But with the Dow Jones Utility Average up nearly 20 percent year to date, a baker’s dozen Portfolio stocks sell for more than their highest recommended entry points. That’s a massive turnaround from earlier this year. Consistent, strong earnings have been one factor: 26 Utility Report Card companies raised guidance after releasing Q2 results.

And only one of the 8 that cut was actually a regulated utility, weather-impacted gas distribution utility Spire Inc (NYSE: SR). The health and growth of underlying businesses always drives long-term investor returns. As the Portfolio discussion highlights, Conrad’s Utility Investor recommendations are on the right track.

In 1996, US telecommunications deregulation broke up the Baby Bell monopoly. But contrary to the best efforts of regulators, politicians and especially competitors, market share consolidation has accelerated ever since. Now it’s the end game. AT&T Inc (NYSE: T), T-Mobile US (NSDQ: TMUS) and Verizon Communications (NYSE: VZ) increasingly dominate the still growing and rapidly evolving market. And the battle has shifted to convergence, as the Big 3 combine fiber broadband and 5G wireless networks to better hold onto customers, boost revenue and cut costs.

Fool me once shame on you, but fool me twice shame on me: That seems to be what many think of AES Corp (NYSE: AES), selling for 8.2 times expected next 12 months earnings and yielding north of 4 percent. In contrast, Wall Street is positive, with 10 research houses tracked by Bloomberg Intelligence rating buy versus 3 holds and no sells. And management raised 2024 earnings and EBITDA guidance in early August, reaffirming expected annual growth of 7 to 9 percent for earnings and 5 to 7 percent for EBITDA through 2027.

Big utility stocks stayed on a winning streak last month. The Dow Jones Utility Average is now up nearly 20 percent year-to-date. That’s about 10 percentage points better than the Big Tech stocks in the Nasdaq 100. And it’s out ahead of the S&P 500’s 14.5 percent. Despite the rally, utility stocks also remain historically under owned. The biggest in the S&P 500—NextEra Energy (NYSE: NEE)—has crept up to #52 from #55 a month ago. But it’s less than a third of a percentage point of the overall index. And you have to go down to 101th place to find another utility, Southern Company (NYSE: SO) at just 21 basis points of the index.

Regulated utilities aren’t immune from stumbles. And Algonquin Power & Utilities (TSX: AQN, NYSE: AQN) negatively surprised me in early August, with its second dividend cut in 18 months. When a company reduces guidance multiple times in succession, it’s clear management did not fully anticipate business headwinds. And usually the best course for investors is to move on.

In early 1981, General Public Utilities—predecessor company of FirstEnergy Corp (NYSE: FE)—sold for less than $2 a share. The Pennsylvania electric utility faced an uncertain future in the wake of the 1979 nuclear accident at its Three Mile Island Unit 2 reactor. And few would go near the stock, especially the investors who had ridden it down with the incident.