Feature Article

In the past year, BCE Inc (TSX: BCE, NYSE: BCE) took hits from pandemic fallout and government pressure to cut broadband and wireless rates. And though less exposed than archrival Telus Inc (TSX: T, NYSE: TU), the company was forced to overhaul 5G strategy when equipment maker Huawei became persona non grata.

We start this month’s Portfolio strategy discussion with the three cornerstones of our investment strategy: 1) Sell stocks of companies that are weakening as businesses, 2) Build a pile of cash by unloading weakening companies and also taking partial profits on favorites that have run to unsustainable valuations, 3) Build a watch list of high quality companies to buy when they hit designated entry points.

Zero companies in our Utility Report Card coverage universe announced dividend cuts last month. To date, only a small number have shared calendar Q4 results and guidance. But that’s still a very good sign managements are comfortable with steps taken so far to deal with what for most are still quite challenging business conditions.

Net zero emissions of carbon dioxide by 2050: We’ve now heard that promise made by dozens of countries as well as US electric and natural gas utilities. Even midstream energy companies have joined in. And 1,185 corporations worldwide have now signed onto the Science-based Targets Initiative framework, slated for publication in November of this year.

Takeover activity was the bright spot in an otherwise gloomy year for communications, with two more deals closing in December. New Aggressive Holding Telephone & Data Systems (NYSE: TDS) is this year’s most eligible candidate for a high premium offer.

Locked in 6 to 8 percent annual earnings growth secured by steady rate base expansion; Strong regulatory relations in 8 southern states, particularly Texas; A dividend that’s nearly doubled over the past decade and is still covered better than 2-to-1 by profits; A secure A-rated balance sheet and operating metrics routinely at the top for natural gas distributors.

Conservative Holdings up 2.6 percent, Aggressive Holdings ahead by 12.8 percent, Top 10 DRIPS a -12 percent loss. Those are the CUI Portfolio returns for 2020. By comparison, the Dow Jones Utility Average gained 1.5 percent, also including dividends paid. And the popular Utilities Select Sector SPDR ETF (NYSE: XLU) was up 0.07 percent. 

Last year, 25 coverage universe companies cut or eliminated dividends. That’s more than one in eight we track and compares to just 16 in 2019. And it was the largest number in at least a decade for this group of ordinarily super-stable and financially strong companies.

Years from now, market historians may look back on 2020 as a relatively quiet year for utility stocks—with the Dow Jones Utility Average posting a 1.5 percent return including dividends. Even a cursory glance at my graph reveals anything but a tranquil time. In retrospect, best in class essential services companies demonstrated resilience to the historic pandemic that exceeded even my high expectations.

Regulation is the straw in my Quality Grade system that most often stirs the drink. And when the result is an increasingly volatile mixture, it’s usually best for investors to stand clear.