Utility Stocks Prove Powerful Lure in Current Downturn

In a sign of investors’ renewed hunger for safety and yield, electric utility stocks have roared to new highs this week.

The Dow Jones average of 15 utility stocks, mostly electric companies, rose 0.5% on Monday, 1.5% on Tuesday and 1.2% on Wednesday, pushing the index up 6.89 points for the week so far, to 219.08 on Wednesday. That is just below its 1991 high of 220.89.

In contrast, the Dow industrial average slipped from 2,902.73 last Friday to 2,900.04 as of Wednesday and is off 5.8% from its 1991 high.

Among the utilities hitting all-time highs Wednesday were Pacific Gas & Electric, up 37.5 cents to $31.25; Texas Utilities, up 87.5 cents to $41.75, and Southern Co., up 50 cents to $31.50.

The electric utility stocks are in the right place at the right time, analysts note. Concern about another economic slump is causing many investors to seek out “haven” stocks that would hold up well in a new bear market. Electric utilities fit that bill because power needs, and thus utilities’ earnings, don’t fluctuate much year to year.

At the same time, the continuing slide in interest rates on bank CDs and bonds makes the utilities’ high dividend yields increasingly attractive to individual investors.

The utilities’ latest surge is adding to their spectacular performance last summer, when interest rates began to drop sharply. The stocks’ results this year are enough to make most growth-stock enthusiasts green with envy:

* Year-to-date, many electric company stocks have risen far more than the 14% gain for the average industrial stock, as measured by the Standard & Poor’s 500 index. Chicago-based Commonwealth Edison, for example, has jumped about 21% in price, from $34.75 on Jan. 1 to $42 as of Wednesday. Pacific Gas & Electric shares have soared 25% in that period.

* Add in the utilities’ dividends--most yield 5% to 7.5% annualized--and the “total return” on many of the stocks (capital gain plus yield) is 20% to 30% for 1991.

But do you really want to buy utilities now, with the stocks at all-time highs? If you believe that the economy will grow slowly at best in 1992 and that interest rates won’t rise much, the electric utilities could continue to attract a lot of new fans next year. Many investors just seem to be getting the message: At the Franklin Group of mutual funds in San Mateo, the $1.3-billion Franklin Utilities fund has recently become the firm’s best-selling stock fund, co-manager Greg Johnson says.

Barry Abramson, utility analyst at Prudential Securities in New York, notes that the average electric utility dividend yield is 6.5% today. Though that has eased from 7.2% at the start of the year (because the stocks have risen), it still beats what most investors can find on bank CDs or other short-term accounts. In fact, that 6.5% yield is two full points above the rate on three-month Treasury bills, which pay a mere 4.5%.

But the real attraction of electric utilities isn’t the current yield--it’s the prospect for dividend hikes each year. If you own a bond or CD, your interest return is fixed. Not so with utilities: Many raise their dividends at least once a year. Abramson believes that the average increase will be 2.5% next year for major electric utilities.

Over time, rising dividends give you significant protection from inflation. Example: Say you bought shares of SCEcorp, parent of Southern California Edison, for $30 each in 1986. At that time, the annual dividend per share was $2.25, so your annualized yield was 7.5%.

Since then, SCEcorp has raised the dividend every year. It’s now $2.72 a share. On your original shares bought for $30, the $2.72 annual dividend works out to a yield of 9.1%. The only other place you can find a yield like that today is on high-risk junk bonds, which, of course, are the antithesis of safe utilities.

What could go wrong for the electric utility stocks? If the economy starts to grow rapidly and/or interest rates rise, investors will look elsewhere for stock ideas. That’s why you don’t want to buy the electrics today unless you’re a long-term investor--because that’s where the real payoff comes, with dividend growth.

Which utilities look best? Abramson favors Southern Co. (which serves much of the Southeast), Dominion Resources (Virginia), General Public Utilities (New Jersey) and Pacific Gas & Electric (Northern California). The yields on his favorites tend to be lower than average, but he expects their dividends to grow faster than the 2.5% annual average increase he projects.

Edward Tirello, utility analyst at Smith Barney, Harris Upham & Co., takes the opposite tack: He favors stocks with above-average yields, yet whose dividends he believes are safe (meaning the companies aren’t in danger of cutting their dividends because of financial weakness, nuclear plant problems or other troubles).

His safe high-yield favorites include Commonwealth Edison (northern Illinois), Texas Utilities (northern Texas) and American Electric Power (across the Midwest).

Highway to Profits? Two California-based highway construction companies saw their stocks jump early this week as Congress debated and finally passed a landmark $151-billion transportation bill.

Shares of Highland-based Kasler Corp. ended Wednesday at $10.50 on the New York Stock Exchange, up 25% from $8.375 last Friday. Granite Construction Corp., based in Watsonville and traded on the NASDAQ market, closed at $23.75 Wednesday, up 8% from last Friday.

The bill, which could boost highway spending 40% during the next six years, won’t necessarily be an outright boon for firms such as Kasler and Granite, says Richard Rossi, analyst at Dean Witter Reynolds. “But is it a plus? Yes,” he says. “California gets a nice chunk” of the added money, Rossi says.

One key aspect of the bill is that it allows states to switch most of the extra highway-construction funds to mass transit projects if they so decide. So it isn’t clear how much of California’s windfall will go toward highways, new or rebuilt.

Still, Kasler Chief Executive E. Robert Ferguson is optimistic. “A lot of California projects (were) just waiting for this bill to pass,” he says. His firm’s annual revenue now runs about $200 million, double what it was in 1987.

Rossi believes that Kasler earned 60 cents a share in the fiscal year ended Oct. 31 and that 70 cents is probable this fiscal year--a 17% increase. Ferguson says he is “comfortable” with both estimates. At $10.50 now, Kasler stock sells for 15 times the 1992 earnings estimate, which is about the stock market’s average price-to-earnings ratio. So it’s hard to call Kasler a cheap stock.

But the price was as high as $15.50 earlier this year. If investors see better-than-expected results for the quarter ended Oct. 31 (the report is due in the next two weeks), the stock could get another lift.