Research Guide To ELECTRIC UTILITY INVESTING 2014
investment will continue to be needed
in the electric industry to meet mandated reliability and environmental needs.
We also foresee this growth occurring
without major customer cost increases.
Pursche: East Coast electric
utilities continue to be the sector of
choice for conservative revenue and
dividend growth, whereas West Coast
utilities should be the beneficiaries
of continued population growth and
Shaughnessy: We favor companies
that have attractive relative valuations,
good growth prospects, can generate
free cash flow, have shareholder friendly management teams and have good
regulatory visibility, where appropriate. In general, we tend to find more
companies with these characteristics
in the integrated or independent electric utilities space than in the regulated
space. We believe these companies offer the best risk/reward opportunities.
Simmons: There are certain areas
within the utility sector with better
businesses. There are better growth
opportunities within the utility sector
within renewables, electric
transmission and natural gas
Utilities with good positions in these three businesses continue to see better
growth opportunities. In the
traditional regulated utility businesses, management
[teams] are having to work harder to
get growth and are more dependent
on sustaining a good regulatory relationship with state regulators.
Spratt: We favor regulated utilities
with above-average organic growth,
supportive regulators, stable earnings
power and attractive capital expenditure programs to drive visible earnings and dividend growth. We also
focus on utilities with often under-appreciated or not fully valued energy
and energy infrastructure operations.
Consolidation has been a theme
we’ve focused on for two decades and
continues to aid our results. Over the
years, we’ve benefited by owning most
of the companies acquired. We expect
asset transactions and consolidation
to continue in the utility space.
What is your outlook on electric
utilities’ total return potential?
Kohli: We remain favorably
disposed on the long-term
fundamentals of the industry,
believing most companies
have opportunities to invest
for environmental and reliability needs for many years
into the future. With interest
rates at near historic lows,
however, we are wary that any uptick
in long-term bond yields could have a
negative impact on these stocks.
Pursche: Almost all electric utilities are trading within their 2017-2019
target price range, according to Value
Line. We currently see a long-term potential of 4% for this industry.
Shaughnessy: While utilities have
lagged over the recent intermediate time period ( 3-5
years), given the strong equity market, they have provided a solid relative total
return and risk-adjusted performance over the long term
( 10 years). Going forward,
utilities are likely to continue
to provide an above-average dividend
yield relative to the broad market and
modest capital-appreciation potential.
Simmons: It makes sense to own
some utilities for protection against
another market downturn. Returns
for the utilities sector and the market
are always variable, but the returns
and volatility of the utility sector
should be less volatile and more predictable than the broader market.
The sector should offer positive
absolute returns but could trail the
returns of the broader market if the
economy continues with its strong
recovery. Utilities participating in the
natural gas infrastructure build-out
have the potential to offer commensu-
rate returns with the market but with
lower risk and volatility.
Spratt: Utilities face many challenges and opportunities from regulation, distributed generation, tougher
emission standards, and ongoing capex requirements
to meet the needs of society.
But in this space, you have to
spend money to grow earnings. Not all utilities are
created equal, and stock selection is critical to deliver
attractive long-term results.
The utility group often gets
lumped together and may momentarily move together, but each unique
suite of assets, capital spending programs, regulatory environments, local
economic conditions and company
business plans is a critical factor in the
merits of any individual utility stock
investment. For utilities that possess
the right combination of these factors,
the soil is quite fertile for growth.
Broadly speaking, the monopolistic
nature and durable business model of
utilities are a sturdy foundation for solid
results over the long term. Also, the increasing need for alternative sources of
income beyond bonds, income growth
to offset inflation (dividend growth) and
aging demographics among investors,
as well as mature pension plan assets,
all position the utilities and other listed
infrastructure assets to grow investor
pocket-book share in the years ahead.
More Info on Electric Utilities
The Edison Electric Institute shares
regular updates on the electric utility industry for investors and advisors, including information on stock
performance and dividends. See the
dedicated page on group’s website: