Utility Stocks: Trade Flash for Dependable Payouts
The utility stock has been a "no-brainer" investment, an obvious choice of those foraging around to find greater income. In 2010, the prospects of this traditional vehicle may improve somewhat.
Exciting, utilities stocks are not. The average utility mutual fund has been a relatively flat performer this year, despite a gain of 30 percent over the past 12 months and a five-year annualized return of 5 percent, according to
Yet conservative and retired investors usually covet utilities not for any flash, but for steady dividends and the hope that dependable payouts will continue far into the future. Regulation by state commissions plays a crucial role in that.
"Utilities regulation has been more balanced and constructive over the past five years than it has been the past 20 years," said Michael Worms, utilities analyst for
Utilities are now actively building environmentally clean infrastructure, he said, whether it involves wind, solar or smart meters. State commissions are approving these initiatives, which are generating added earnings for the companies.
"One positive going forward is that the utilities are now back in the rate case game, filing with regulators after several years in which they hadn't been seeking any increases," observed
Regulated utilities are guaranteed by the regulators that they will have the ability to recover their investments plus a fair rate of return, said Muir. That provides assurance to investors dependent upon their income.
"Utilities offer leverage to their local or regional economy and a fairly steady cash flow, which is a combination many investors would find attractive," said
The regulated utility
While CMS has had to cope with
Less attractive but nonetheless featuring "good stories" are regulated utilities
In mutual funds, the
Emphasizing electric utilities, its largest holdings are
There are also utilities for higher-risk investors.
"If you look at electric utilities, they are essentially what they are, but the independent power producers are totally unregulated companies with earnings that swing wildly," explained Muir. "When power prices go up, such as when the economy picks up speed, their stocks will follow."
Muir recommends stock of natural gas utilities with exploration and production assets such as
"We're starting to see slightly improving utilities earnings, though there is still uncertainty as to how strongly the economy will recover and what that means for energy demand," said Miller. "As we get an uptick in economic activity and industrial production with more confidence among consumers of energy, we would expect an uplift in earnings."
Fully regulated utilities have better cash flow. Independent power producers, meanwhile, are tied to the volatility of commodity markets and, with prices low since mid-2008, they've "gotten killed," Miller said. But there is opportunity in their current low prices.
The company exited Chapter 11 bankruptcy in 2003, purchased 10,900-megawatt power generator Texas Genco in 2006 and acquired Reliant's marketing and trading operation last year. It has been entering into long-term supply agreements and replacing high-cost Appalachian coal with low-cost Western coal as the fuel source for its coal-fired plants.
The NRG board has rejected two takeover attempts since 2006.
Among other "pure play" independent power producers, Miller recommends
Doing your homework before buying utilities stocks is crucial because their business mix can vary considerably:
"Integrated companies have regulated and unregulated parts of their businesses," explained Miller. "For instance,
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