Safe Widow and Orphan Utility Stocks May Be History
There was a time when electric, gas and telephone utility stocks were considered so safe, and their dividend payments so secure, that Wall Street dubbed them “widow-and-orphan” stocks--in other words, appropriate for people who simply couldn’t afford to lose money.
As many utility-stock owners have painfully discovered in the 1990s, times have changed, and generally not for the better in the case of investors who value cash dividends and some semblance of share-price security.
Pacific Telesis, a.k.a. the phone company, provided a fresh reminder of utilities’ shifting fortunes last week, when the financially strained firm agreed to merge with rival Baby Bell SBC Communications. Although PacTel’s depressed stock got a lift on the news, the company also announced a dividend cut while the deal is pending--to reflect the smaller dividend shareholders will ultimately get from SBC.
But PacTel is just the latest investment disappointment among once-gilded California utilities, and it’s not at all the worst of the lot. Pity the poor widow or orphan whose stock portfolio has consisted of Edison International (parent of Southern California Edison), Enova (San Diego Gas & Electric) and Pacific Enterprises (Southern California Gas).
Edison hacked its dividend 30% in mid-1994 to conserve cash in the face of the dawning competitive era for electricity distribution in California. The state Public Utilities Commission’s plan to allow consumers to pick whichever power provider they want by 2003 leaves high-cost producers like Edison little choice but to quickly write off expensive, monopoly-era power plants, penalizing earnings.
Competition should benefit the consumer, of course. But so far, the shareholder is underwriting the cost of moving to the new era.
In San Diego, Enova has emerged better prepared for competition than Edison. Even so, it has raised its dividend just 16% since 1989, less than the 18% dividend growth of the stock market overall as measured by the Standard & Poor’s 500-stock index. And Enova’s stock has virtually been dead money since 1989.
In Northern California, meanwhile, Pacific Gas & Electric appears poised to follow Edison down the dividend-slashing path, according to utilities analyst Barry Abramson at Prudential Securities in New York. PG&E; plans to divest a number of plants while freezing electric rates through 2001. Abramson sees the dividend as a victim: He expects it to be cut perhaps 23% by year’s end.
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Yet the financial misadventures suffered by electric company shareholders pale compared with what the gas company’s shareholders have experienced. Pacific Enterprises’ decision in the 1980s to diversify into retailing, land development and oil exploration ended disastrously. Following massive write-offs, the company’s stock today is half its level in 1989, and its dividend is a shadow of its former self, although the humbled firm has been slowly increasing it from much lower levels since 1994.
It’s true that utility deregulation is, to varying degrees, a nationwide movement, and it has forced numerous other formerly monopolistic utilities besides the California companies to sacrifice their dividends in the face of dwindled earnings prospects. Competition is literally the way of the world today, and it hardly seems realistic to think that it shouldn’t be the price-determinant for the most basic things we buy--electricity, natural gas, telephone service.
But as competition has intensified in nearly all industries, widows, orphans and other investors who prefer their stocks with some kind of dependability factor--in terms of capital preservation and dividend income--have found the pickings ever slimmer.
Indeed, the 1990s have been unkind to conservative, income-seeking investors in general, as bond yields have declined while many traditional big-dividend stocks in the utility, energy, real-estate and auto sectors have skimped on dividend increases. At the same time, investors’ appetite for faster-growing, more speculative stocks has ballooned.
“The income investor has been having a tough time in the ‘90s, while the growth investor has been in hog heaven,” says Bradlee Perry, former chairman of the Babson Funds in Boston.
Even those companies with the financial wherewithal to raise dividend payments meaningfully have often decided against it. Investors don’t want fully taxable dividends--they want tax-advantaged capital gains, the argument goes. Better for a company to use cash to buy back stock, thereby pushing the share price higher, than to put it directly into shareholders’ pockets in the form of dividends.
Lately, the anti-dividend mentality has been softening. First-quarter dividend increases were surprisingly robust, Standard & Poor’s Corp. says. But with the S&P; 500 index dividend yield at a mere 2.2%, near its all-time low, Corporate America would have a long way to go before restoring the kind of dividend “cushion” that has historically buffered stock prices in times of market turmoil.
Will that dividend cushion ever be needed again? Maybe today’s widows have become just as enamored of growth and capital gains, and as disinterested in dividends and relative share-price stability, as Wall Street pros profess to be.
Geraldine Weiss, editor of the La Jolla-based Investment Quality Trends newsletter and champion of higher dividends, argues that the day will come again when investors will value what a company actually pays them, not just what it promises them in share-price gains. But what it will take, she concedes, is a serious bear market to restore both companies’ and investors’ appreciation of the role of dividends.
For now, even if the classic widow-and-orphan stock is only a memory, there remains a decent universe of companies whose dividend yields are above average and whose dividend payments are reasonably secure and likely to rise, says Stan Nabi, vice chairman of investment firm Wood, Struthers & Winthrop in New York. He cites such names as oil giant Amoco, insurer ITT Hartford and defense contractor General Dynamics.
And there are, of course, still many utilities that offer high-dividend yields. But the days of blindly buying a big-dividend stock and forgetting about it--trusting in the company--are gone for good, Nabi notes: “Unfortunately, you now have to wake up every morning and ask [about your companies], ‘Has anything changed?’ ”
For California Utilities, a Dismal Decade
California electric, gas and phone stocks were classic “widow-and-orphan” holdings in the 1980s: strong stocks with rising dividends. But since 1989, shares of four of the five utilities have either plunged or barely risen, while three have slashed their dividends--and a fourth (Pacific Gas & Electric) may be next to cut its dividend.
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Stock price: Pctg. Annual Div. chng. Company 12/89 Now change div. vs. 1990 Pacific Telesis $29.27 $33.25 +115%* $1.26** -38% Pacific G&E; 22.00 23.38 +6% 1.96 +29% Enova Corp. 22.56 22.63 nil 1.56 +16% Edison Intl. 19.69 16.38 -17% 1.00 -24% Pac. Enterprises 50.50 26.88 -47% 1.44 -59% S&P; 500 stock index 353.40 655.86 +86% 14.33 +18%
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* including current value of AirTouch spinoff
** annualized rate beginning with next payment
Source: Value Line Investment Survey; Bloomberg Business News
