Investing Topics: Electric Utilities

The Conrad’s Utility Investor Portfolios officially launched on July 31, 2013. Since that time, the Dow Jones Utility Average is off -2.3 percent, including dividends paid.

My Aggressive Income Portfolio is up by 9.3 percent, while the Conservative Income Portfolio has returned 3.3 percent.

US electric utilities have enthusiastically embraced renewable energy the past few years. That includes companies that have traditionally relied heavily on fossil fuels and nuclear energy.

By any measure, 2013 was a great year to own stocks. It was also an exceptionally bad time to bet against the United States of America. And that remains the case as we open the page on 2014.

Will Santa Claus visit utility stock investors this year? The sector was out of the gate quickly to start the fourth quarter of 2013. But concerns about the “tapering” off of Federal Reserve bond buying quickly slowed things down.

Will the Federal Reserve really “taper” off its easy money policy? The stock market has already reacted, with dividend-paying stocks leading the selling: The Dow Jones Utility Average is now flat for the fourth quarter, after being up better than 5 percent through mid-November.

Fear of rising interest rates again appears to be triggering selling of utility stocks. I’ve shown over and again that the sector’s so-called interest rate sensitivity is a false relationship over any recent period longer than a few weeks. Consequently, lower prices should be viewed as a buying opportunity for recommended stocks.

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.