Feature Article

The last 18 months have been rough going for financial companies. And unfortunately, that’s when we re-entered Hannon Armstrong Sustainable Infrastructure Capital (NYSE: HASI), a business development company specializing in renewable energy and efficiency projects. Organized as a REIT for tax reasons, Hannon has more than doubled its total assets since 2019. And management reporting year-over-year increases in Q1 of 25 percent and 15 percent in its portfolio and managed assets, respectively. Distributable net income per share stayed on track with guidance for 10 to 13 percent annual growth, fueling robust dividend increases of 5 to 8 percent.

California’s wildfires are getting worse. The state’s electric power grid, however, is systematically becoming more resilient. From 2019-2022, for example, cumulative structures destroyed by wildfires linked to Edison International’s (NYSE: EIX) southern California system were 96 percent less than in the 2017-18 period. And as a result, the company’s post-2018 wildfire liabilities not covered by insurance have been immaterial, versus $8.8 billion incurred in 2017-18.

The headline may sound counterintuitive. But paying attention on what you can control has consistently proven to be the best way for investors to stay whole in tough times, while positioning for the recovery that always follows. The best metaphor for the current stock market is a small group of generals leading an impressive-looking advance, but with a rapidly diminishing number of troops behind them. We know from history that these things have always ended badly. But while they last, it’s increasingly difficult for investors to resist their pull.

First the good news: No companies in our Utility Report Card coverage universe announced dividends cuts last month. The bad news is none escaped the Endangered Dividends List. And in fact, the situation for several worsened, raising odds of cuts. That includes especially the three communications stocks: Telephone and Data Systems (NYSE: TDS), Uniti Group (NSDQ: UNIT) and Vodafone Group (London: VOD, NYSE: VOD).

A couple months ago, the stock market appeared headed for a relapse of potentially epic proportions. Founded on the premise the Federal Reserve’s battle against inflation had been won, the early 2023 rally was fizzling, as it became clear the central bank wasn’t relenting. The banking system had revealed some fairly large cracks, with the demise of SVB seeming to spread to regional banks in general. And the federal government was lurching toward a first ever default.

Back in 2003, Conservative Holding Duke Energy (NYSE: DUK) was a sprawling utility conglomerate. Its global portfolio of assets included real estate management, an Ecuadorian wireless phone and Australian natural gas pipelines. That’s when management began a long transition back to its regulated electric utility roots, selling assets, paring debt and investing in rate base. And later this year, Duke will finish the journey by selling its commercial renewable energy business, turning the company’s focus squarely on its $145 billion, 10-year utility CAPEX plans.

In December 2020, I added FirstEnergy Corp (NYSE: FE) to the Aggressive Holdings on a simple premise: Investor expectations for the outcome of the Ohio bribery scandal were far too pessimistic—and a less gloomy outcome would trigger a big rebound for the stock. As it turned out, the utility’s former management was found guilty of bribing key state officials to pass legislation favorable to the company. But Ohio contributed only about 16 percent of FirstEnergy’s earnings, meaning the state needed the utility more than the other way around. And state and federal regulators have as result focusing on the executives rather than the company, allowing fresh management to repair frayed regulatory relations.

There’s no one right way to invest. The key is to seek an approach you’re comfortable with and stick to it, absorbing the best information you can find to make the best possible decisions. The approach that suits me is decidedly long-term. Mainly, I like to build positions in companies I believe will grow consistently, and when their stocks trade at what I believe to be discounted prices.

There were no additional dividend cuts in the Utility Report Card coverage universe this month. And two companies earned an exit from the Endangered Dividends List, thanks to better than expected Q1 results and guidance. NuStar Energy (NYSE: NS) is still challenged by heavy debt taken on in the previous decade. And despite minimal maturities through 2024, management will have to devote the energy midstream company’s spare cash to paring down its $4.6 billion of borrowings. That’s almost three times the stock’s current market capitalization and includes nearly $2.1 billion with variable rates.

The history of US electric, natural gas, communications and water utilities is synonymous with mergers and acquisitions. Over the 120 years or so since these services began to be essential to modern life, there have been literally thousands of mergers between operating utilities. And not one has failed to eventually create a financially stronger, more efficient and resilient company.