Feature Article

Adding water and wastewater customers by acquiring cash-poor systems on the cheap, then upgrading systems under reliable rate plans: That’s been the formula for Essential Utilities’ (NYSE: WTRG) reliable 7 to 10 percent annual earnings and dividend growth since the early 1990s, when it was known as Philadelphia Suburban.

In the short-term, the stock market is basically a popularity contest. Investors large and small chase the upside momentum of the hottest themes. Concepts like what a business is actually worth are given lip service at best. And every once in a while, things run so far in one direction that even safe, generous dividends lose their luster. But if you’ve invested for more than a cycle or two, you’ve by now learned the long-term market is more of a weighing machine. And outperforming businesses that gain strength and size over time are eventually rewarded with higher stock prices.

Hawaiian Electric Industries (NYSE: HE) suspended its dividend last month, saving roughly $158 million if continued over the next year. That’s a key piece of the utility’s defense against a wave of lawsuits resulting from Maui’s devastating wildfire, which wiped out the town of Lahaina and killed upwards of 100 people. Management has also drawn down most of the company’s $375 million in credit lines. And it’s considering restructuring moves including spinning out its American Savings Bank unit.

Nine times since the end of World War II, the S&P Utilities Index has dropped by more than -20 percent from its previous high. The most recent occurred over the space of just one month: February 2020 to March 2020 in the wake of the pandemic panic. Over the following 30 months or so, utilities generally moved higher greatly outperforming the broader stock market for most of 2022. But since then, headwinds have generally overwhelmed tailwinds, though the S&P Utilities to date has sustained less damage than any of the periods highlighted in my table “Utilities’ Post-War Ups and Downs.”

The Inflation Reduction Act’s hundreds of billions of dollars of tax credits are the law of the land. But you wouldn’t know that from the sorry performance of renewable energy stocks. That includes Aggressive Holding Clearway Energy (NYSE: CWEN), which has lost nearly one-quarter of its value so far in 2023.

In July 2017, new Aggressive Holding Avista Corp (NYSE: AVA) accepted an all-cash takeover offer of $53 per share from Canadian utility Hydro One (TSX: H, OTC: HRNNF). Then followed basically a year and a half of futility. And the parties eventually broke off their deal in January 2019, when regulators in Idaho and Washington rejected it due to concerns about then Ontario premier Doug Ford. Avista shares overnight dropped from low-50s to the low-30s and have been attempting to fight their way back ever since. The primary hurdle: Investor concerns about regulation in Alaska, Idaho, Montana, Oregon and especially Washington (60 percent of rate base), where the needs of the utility’s eastern state franchise are a world away from coastal politicians.

Rarely have shares of a high quality essential services company like Verizon Communications (NYSE: VZ) been treated so poorly by investors. In the July 18 Utility Roundup “Verizon and AT&T: Some Thoughts,” I highlighted two catalysts for downside this summer: Fear that Amazon.com would offer wireless service through its Prime brand and a Wall Street Journal investigative piece alleging telecoms have potential liabilities in the tens of billions of dollars from owning toxic lead-lined cable.

When you’re a long-term investor, momentum isn’t always going to flow your way. And when it’s against you—whatever the reason—it can be intensely frustrating, no matter how much in dividends you’re collecting. The greatest danger is it’s all too easy to conflate stock market weakness with a truly unraveling business. You may bail out prematurely from a company that’s only undergoing a temporary setback. Or alternatively, you might hold onto a stock that’s only just beginning its descent, as declining sales lead to dividend cuts and worse.

When a company cuts its dividend, its share price usually craters. The exception is if the reduction is part of a larger strategic move that makes sense. That’s the case for Aggressive Holding MDU Resources (NYSE: MDU), which reduced its quarterly dividend for payment in October by -43.8 percent to 12.5 cents per share.

In the 120 years plus since electricity, heating and water became essential services, not one regulated operating utility has ever gone out of business. That includes companies forced to declare bankruptcy, most recently California’s PG&E Corp (NYSE: PCG) The same can’t be said for communications. Since the Telecom Act of 1996 ended local phone monopolies, literally hundreds of companies have appeared only to vanish in a few years. And several in my Utility Report Card coverage universe are flirting with some form of debt restructuring now, including Altice USA (NYSE: ATUS), DISH Network Corp (NSDQ: DISH) and Lumen Technologies (NYSE: LUMN).