Something Electric in the Air Again
Electric utility stocks, which many investors have all but ignored in recent years because of the industry’s vast challenges in an increasingly deregulated field, may be coming back into vogue on Wall Street.
The Dow Jones index of 15 utility stocks, mostly electric companies but also including some gas utilities, recently reached its highest level since 1993.
Although the index fell back somewhat in the stock market sell-off in late October, it has rebounded to 243.11 as of Monday, and stands just 2% below its recent high of 247.99.
By contrast, the Dow Jones industrial average, at 7,552.59 on Monday, remains off nearly 9% from its August high.
Meanwhile, a Standard & Poor’s index of 26 electric utility stocks, at 79.15 on Monday, is off just marginally from its 12-month high of 80.66 set Oct. 3.
Among individual electric issues, those trading very close to their 12-month highs despite the broad stock market’s weakness of late include PG&E; (parent of Pacific Gas & Electric), at $26.06 on the New York Stock Exchange on Monday; and New York’s Consolidated Edison, at $35.06 on the NYSE.
What’s making the electrics popular again--after nearly five years of seemingly constant bad news about the industry? In part, electric stocks appear to be resuming their historic role as “defensive” issues: In times of general market turmoil, stocks that offer above-average dividend yields and relative safety of principal suddenly begin to rank high on investors’ must-own list.
The stocks’ status as hedges against market trouble waned after 1993, when many electric utilities began to slash their previously sacrosanct dividends--to prepare for open competition in the deregulated world of power generation and supply sought by many states and the federal government.
Dividend cuts are still occurring, and even where they aren’t, dividend growth at many utilities is no longer a given. Still, for many of the companies, the worst news on dividends is probably past. And for defensively oriented investors, the yields on many electric stocks understandably appear enticing: Consolidated Edison’s current annualized yield is 6%. PG&E;’s yield is 4.6%.
Compare those numbers to the 1.7% yield of the average blue-chip stock.
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But the renewed attraction of the stocks has to do with more than just dividend yields, some analysts say.
For one, while deregulation is proceeding, and clearly raises the stakes for utility investors in the long run (because companies are no longer protected by the monopolies they enjoyed for most of their existence), more investors are realizing that there must be winners as well as losers among utilities in a deregulated environment.
Brokerage Morgan Stanley, Dean Witter’s utility analysts, returning from the annual Edison Electric Institute conference in October, filed this report to clients:
“We believe there was a lighter, more cheerful feeling at this year’s [conference] . . . compared with any of the gatherings of the last five years. Companies and investors appear to be encouraged by the sense that they were surviving the difficult experiences of the industry restructuring and engaging in the building of a new world. And with the restructuring now halfway done, more or less, it doesn’t seem so horrible.”
Analyst James L. Dobson at Donaldson, Lufkin & Jenrette Securities, who now rates the stocks to outperform the market overall in the near term, sums up the industry’s appeal this way: “The valuation remains compelling--particularly on a relative price-to-earnings ratio basis. The sector’s defensive characteristics are becoming more valuable. . . . and the group remains under-owned” by large investors after years of discouraging news.
What’s more, mergers within the electric industry have boomed in recent years, and more deals are coming, Dobson said.
Not surprisingly, though, Dobson and other analysts argue that individual stock selection is critical--because deregulation will undoubtedly claim more victims in the electric industry over time.
As a reminder of just how tough the last five years have been for some electric investors, note that the S&P; electric stock index still is well below its record high of 88.30 reached on Aug. 31, 1993.
Dobson favors such names as Boston Edison ($32.06 on NYSE, current dividend yield: 5.9%); Texas Utilities ($35.94, NYSE, 5.8%); and MDU Resources ($28.44, NYSE, 4%).
Morgan Stanley, Dean Witter’s analysts are touting such names as PG&E;, Southland-based Edison International ($25.63, NYSE, 3.9%) and Duke Energy ($48.19, NYSE, 4.6%).
“We sense that investors are starting to get excited about the future unregulated arena,” Morgan Stanley, Dean Witter’s report said.
Maybe so. But investors tempted to dabble in individual electric stocks should realize that picking winners won’t be a cakewalk. These stocks now require as much, or more, study as any other company.
The good news, however, is simply that many investors seem to be thinking about these stocks again, after ignoring them for much of the 1990s. And if the broad market takes another spill in the near future, the focus on electric utilities may just intensify.
