Utility Stocks. Time to take a new look at the Utility Sector.
Times They are a Changing
Utility stocks can look like bargains one day and then flip them upside down and you might be left scratching your head. Separating the good from the bad can be trickier than investors might expect from this once-quieter sector of the stock market.
In September 1993 to the end of 1994, the Standard and Poor's index of electric utilities fell a whopping 25 percent. At any other time in history, a decline of that nature could have sent a huge "buy" signal to investors everywhere, just on the theory that the shares couldn't possibly fall lower.
Today, the approach is considerably more complicated. Dividends on many of these issues now provide yields in the range of 5 to 8%. Some Wall Street pros consider these stocks could produce healthy returns if interest rates decline or merely stabilize near their current levels. That should allow for stock prices to stay where they are or possibly edge up a bit.
A number of analysts argue that deregulation and increasing competition in the utility industry could keep many of these stocks from enjoying a broad resurgence.
After all, the industry is just not what it used to be, according to Prudential Securities. This is due to the fundamental restructuring of the business. It will permanently increase the risk levels of utility stocks."
On it's way out is the utility industry our parents and grandparents knew, when the local electric company enjoyed a regional monopoly and paid stock dividends that were pretty much guaranteed. Then, investors bought utilities to capture the steady income from those dividends, not because they thought the stocks were going to go up or down at all.
Higher interest rates will hurt utility stocks in two ways. First, they add to utility companies' interest costs because utilities tend to be debt- heavy and capital-intensive. Secondly, higher rates siphon income-oriented investors away from utility stocks as yields on bonds become more appealing.
It can be a mistake to look only at interest rates for clues to how utility stocks will behave. In the past, after the market declined, you could then start looking for good values. Today, you have to consider whether any of those companies that appear to be good values have the ability to withstand a more competitive business environment. That becomes the key!
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