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Executive Summary

Utilities Holding Steady, But Watch for Shifting Ground

By Roger S. Conrad on Mar. 14, 2022

After briefly rising over 1,000 for the first time, the Dow Jones Utility Average is in the black this year. That means essential service companies, including big communications stocks, are outperforming pretty much everything this side of oil and gas.

Electric, gas, energy infrastructure, water and communications service providers are the kind of substantial, reliable, dividend paying companies investors like to hold in turbulent times. And early 2022 certainly qualifies, with the highest inflation in 40-plus years, a diminished but lingering pandemic, continuing supply chain disruption and now a full-on war.

As I highlight in this month’s feature article, there are more winning investments than losers in CUI coverage universe resulting from Russia’s invasion of Ukraine. But the shifting ground means pitfalls as well.

California’s consumer advocate, for example, has reportedly asked regulators to cut water utilities’ allowed return on equity to 7.51 percent from current levels in the 9 to 10 percent range. That in my view is clearly the result of frustration about Golden State utility rates being by far the highest in the nation. And while the reasons are largely beyond managements’ control, utilities are the closest money trees to shake.

Unfortunately, with inflation on the move, affordability questions will only become more important going forward. And how well companies navigate the risk will increasingly determine stocks’ investment returns, particularly in the electricity sector where investment in the ongoing transition to cleaner power sources is at new highs.

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