Feature Article

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.

Fourth quarter is usually a good time to hold utility stocks. But it’s only rarely a good time to buy, as prices often reach yearly highs.

Capital spending plus regulatory support equals rising earnings, dividends and share prices: That’s the formula for superior total returns in utility stocks. And it’s what new Conservative Income Portfolio recommendation SCANA Corp (NYSE: SCG) is locked in to deliver at least to the end of the decade.

When AES Corp (NYSE: AES) started doing business in the 1990s, it had a simple philosophy: Scour the globe for growing electricity demand and execute projects to meet it.

PVR Partners (NYSE: PVR) earns an exit from my Endangered Dividends List this month. The catalyst was not third quarter earnings results, but the acquisition by Regency Energy Partners (NYSE: RGP) for 1.02 Regency units and a cash payment to be determined at close in first quarter 2014.