Investing Topics: Electric Utilities

Barring a real financial earthquake, this will be the ninth year of rising interest rates since 1992.

2013 will also be the eighth of those nine that utilities and other dividend paying stocks finished in the black. The only exception was 1994, when deregulation fears upended electricity and communications.

Utilities also rose eight years when rates fell. All their biggest declines, however, were during years of falling interest rates, particularly 2008.

Utility stock prices ultimately reflect the health of underlying companies. Stocks of financially healthy companies with growing dividends always move higher. But when an economic calamity brings interest rates lower quickly, they can drop in a hurry.

Shares of transmission line operator ITC Holdings (NYSE: ITC) have dropped more than 14 percent from the all-time highs reached in early November. The immediate catalyst: A group of industrial users have demanded the Federal Energy Regulatory Commission cut its allowed returns.

Taper talk is heating up again as Federal Reserve Chairman-in-waiting Janet Yellen’s fate is debated on Capitol Hill. Rate hike speculation, however, is having much less impact on essential services stocks than it did this past spring. And one big reason is strong third quarter results.

Only three of the 28 current Conrad’s Utility Investor Portfolio recommendations have yet to report calendar third quarter earnings. That’s plenty of data to identify relevant sector trends, while we assess the health of individual companies.

The $48 billion leveraged buyout of the former TXU Corp by KKR & Co. LP (NYSE: KKR) and other private-equity outfits set record in 2007. Now, the company's impending bankruptcy underscores the risks of looking for a quick buck in the utility sector.

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.

It’s been barely two weeks since Washington avoided the first federal government default, at least since the Articles of Confederation were in force. The autumn rally in stocks, however, actually began during the heat of the crisis.

The trigger was long overdue recognition the Federal Reserve isn’t going to abandon loose money until the economy is strong enough to handle it. All the “taper” talk that clogged the airwaves for months proved to be meaningless blather.

That’s hardly the first time conventional wisdom has proven disastrously wrong for the investors who bet on it.

The silver lining is resulting volatility was a solid opportunity to buy good stocks cheap. And thanks to that, we’ve already seen sizeable gains for the Conrad’s Utility Investor Model Portfolios, though they’ve only been around three months.