Feature Article

Long-term contracts with creditworthy customers, strong finances and scale: Aggressive Holding NRG Energy (NYSE: NRG) features all of them. That’s why the unregulated power company continues to thrive, even as rivals flounder.

Oklahoma Natural Gas Company has provided regulated gas distribution service to Tulsa, Oklahoma since 1906. Today, successor company ONEOK (NYSE: OKE) serves 2.1 million customers as the largest gas utility in Kansas and Oklahoma, and third biggest in Texas.

Seek stocks of healthy and growing companies whose prospects exceed investor expectations. Then build a diversified and balanced mix you can hold long-term, to enjoy the rising cash flow and share price appreciation that growing dividends provide over time.

The Dow Jones Utility Average has lost ground in 17 of the 30 Januarys since 1984. Happily, only 5 of those declines led to a losing year. And in 13 winning Januarys, the average total return was 24.8 percent—the only losing year 1987.

These utilities could be due for a dividend cut. 

Part of me wants to say, “It’s about time.”

But Moody’s decision last month to put $400 billion-plus of sector debt on review for upgrade is unabashedly welcome news for utilities.

Healthy growing businesses produce rising dividends, which in turn push share prices higher: That’s the utility investor’s road to superior and safe long-term returns. And if operating results of our Portfolio companies are any indication, it’s still wide open.

Since World War II, no regulated utility has ever failed to make its bondholders whole from disaster. That gives utility bonds a level of safety no other sector can match, particularly after 11 years of systematically cutting debt and operating risk.

Utility bonds’ years of being under-rated may be coming to an end, now that Moody’s is considering a sector-wide upgrade. But for now, they’re under-priced and therefore yield more than debt of equivalent real risk.

Australia is blessed with immense resources wealth, geographic proximity to emerging Asia, a pro-business government in rough fiscal balance, conservative banking policies, a corporate ethos for paying generous dividends and a currency that keeps pace with global inflation pressures over the long haul.

In short, it’s ripe with high-income opportunities for discriminating investors. And with the US dollar up 14 percent against the Australian dollar this year, great companies are selling at a discount.

Real industry trends don’t spontaneously occur. They’re forged on the ground by what companies are actually doing. And you spot them by focusing on individual companies’ results, and aggregating your findings.