Feature Article

Worries about rising interest rates and inflation pressures have emerged as material headwinds for dividend paying stocks. As a result, the Dow Jones Utility Average has once again failed to break above long-standing upside resistance at its February 2020 all-time high. That makes it 19 months and counting since the DJUA has reached a new peak. And it’s a stark contrast to the S&P 500, which hit one just last month.

AT&T Inc (NYSE: T) still sells for less than 8.7 times expected 2021 earnings. And PPL Corp (NYSE: PPL) yields 2.5 percentage points more than the Dow Jones Utility Average. Why the deep discounts? Because neither company’s management has come clean on how much they intend to cut dividends after completing major transactions early next year, other than to say they intend to “right size.”

According to the US Energy Information Administration’s baseline forecast, Americans will use 40 percent more electricity by 2050 than in 2010. And more than half of that will come from new wind and solar, driven by the combination of favorable government policies, continued declines in the cost curve and development of energy storage.

This summer, the Biden Administration upped the ante even more with a proposal to build 1,000 gigawatts of solar generating capacity in the US by 2035 at a projected cost of roughly $1 trillion. That follows its acceleration of permitting for US offshore wind projects as well, which the government hopes will result in 26 GW of capacity entering service by 2030.

Last week, Centerpoint Energy’s (NYSE: CNP) 7 percent preferred stock converted into 1.8349 of the company’s common shares. That was the maximum possible exchange and the best outcome for the preferred, which also paid a final dividend of 87.5 cents.

Last July, Dominion Energy (NYSE: D) announced a dramatic and somewhat painful move for shareholders: Selling oil and gas midstream assets to a unit of Berkshire Hathaway (NYSE: BRK/B) for $9.7 billion including assumed debt, and cutting dividends -33 percent to reflect the resulting reduced cash flow.

Last week, the Dow Jones Utility Average hit a new high for 2021. But unlike most market sectors, utilities as a group still can’t seem to get over the hump of making a new all-time high. And as this issue of CUI goes to post, the DJUA is still roughly 2 percent below where it crested in mid-February 2020.

Record fiscal and monetary stimulus, pandemic-disrupted supply chains and an upturn in the energy price cycle are stirring global inflation pressures. Consumer prices rose roughly 5 percent in July across the developed world, with the US leading the way.