Utility stocks edge up while the broader market struggles

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It isn’t easy to find good news in the stock market, but here’s some: Many electric utility shares have been surprisingly resilient over the last five weeks, even as the broader market has mostly continued to slide.

Through Monday, the Dow Jones index of 15 utility stocks was up 12.6% from its multiyear closing low reached on Oct. 10.

The Standard & Poor’s 500 index, by contrast, has lost 5.4% since Oct. 10.

Utilities are a classic ‘defensive’ sector, meaning investors often flock to them when the economy is sinking. The companies may not be recession proof, but their revenue is far more stable than that of many other businesses. You can live without a lot of things, but electricity isn’t one of them.

Most utilities also pay decent cash dividends, which helps to support the stocks’ prices. The average annualized yield of the Dow utility index stocks now is 4.4%.

But neither their defensive nature nor their dividends could help the stocks much in late September and early October, when virtually ever sector of the market was falling off a cliff, as many investors were dumping whatever they could to raise cash.

That sell-off accounted for most of this year’s losses in the Dow utility index. The index is off 31.4% since Dec. 31, compared with a 42.1% drop in the S&P 500 and a 37.6% slump for the Dow Jones industrials.

Utilities’ strength in recent weeks isn’t very comforting for the rest of the market, because ‘I think it has to do with investors’ defensiveness in general,’ said Sam Stovall, market strategist at S&P in New York.

But just the fact that utility shares are playing that classic defensive role is a positive sign -- as opposed to the situation in late September and early October. The sector’s recent advance suggests that some investors are again making rational judgments about stocks’ prospects, instead of simply engaging in panic dumping across the board.

Within the utility industry, some stocks have held up much better than others this year. San Francisco-based PG&E Corp., parent of Pacific Gas & Electric, is down a modest 14.4% for the year.

Its downstate rival, Rosemead-based Edison International, parent of Southern California Edison, has fallen 37.7% this year, one of the steepest declines in the Dow utility index.

Because utilities have heavy borrowing needs to finance upkeep and new facilities, some issues may have been hit harder than others in the September-October plunge on concerns about access to funding as the credit crunch worsened. Yet Southern California Edison was able to sell $500 million in long-term bonds in mid-October, a sign investors still were willing to provide financing for major utilities.

Nobody’s going to get rich off most utility stocks in the short run. These are heavily regulated businesses, after all, although many over the last two decades also have expanded into unregulated or less-regulated areas, such as energy exploration.

In a good year, the combination of a 4%-plus dividend yield and modest stock appreciation can mean a double-digit return on utility issues. If investors are looking to ease up from severe risk-aversion, utilities would be a logical place to begin putting some money to work.