Feature Article

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.

When leading Canadian telecom BCE Inc (TSX: BCE, NYSE: BCE) released initial 2024 guidance, many took it as evidence restrictive regulation and escalating competition were undermining growth and dividends. And the stock has generally underperformed since. Nonetheless last week, for the second consecutive quarter, management held firm on guidance in what it again referred to as a “transformational year.” Free cash flow improved by 8 percent to CAD1.1 billion, or CAD200 million after dividends. And the company posted its second best retail Internet net subscriber additions since 2007 and most wireless customer additions in "almost two years" (up 4.4 percent).

From April 2016 through January 2021, we earned roughly 300 percent on Hannon Armstrong Sustainable Infrastructure (NYSE: HASI). We took that profit. But when the stock dropped by more than half during a successful business year, I couldn’t resist re-entry. And despite growing revenue 78 percent, net income 50 percent and dividends by18.5 percent, the company has been the portfolio’s worst performer since.

The Dow Jones Utility Average lagged the S&P 500 by 12.5 percentage points in the first half of 2024. But the first month or so of Q3 has witnessed a dramatic reversal of fortune: It’s utilities beating the broad market average by more than 14 points. And the DJUA is more than 18 points ahead of the Big Tech stocks in the Nasdaq 100. There are several reasons why this great rotation will continue. First, after roughly a year and a half of underperforming the broad market and Big Tech in particular, utility stocks are greatly under-owned by giant passively and actively managed investment portfolios that dominate the market.

Uniti Group (NSDQ: UNIT) now expects to close its proposed merger with privately held Windstream Holdings in “second half 2025.” At that time, management has said it will drop its REIT structure and eliminate its dividend. This implies the company will make at least four more payment at the current rate of 15 cents per share—one-year income return of almost 15 percent. But lest anyone be tempted, consider the following.

Nuclear power has rarely been a popular subject in the 40 years or so I’ve analyzed, advised on and invested in electric utilities. That’s understandable. The plants built in the 1970s and 80s wound up costing several times their initial budgets. State regulators forced utilities to eat billions of cost overruns. And what rate increases did get through triggered the large customer revolt that spurred deregulation in 15 states, along with the District of Columbia.