Utility Stocks

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
dfw_north
Posts: 17
Joined: Sat Feb 14, 2015 6:40 pm

Utility Stocks

Post by dfw_north »

I wonder why utility stocks are trading @ a discount. SR, NJR, OGS etc. Considering low interest rates, it is surprising. What am I missing here? Thank you for for your answers...
Robot Monster
Posts: 2300
Joined: Sun May 05, 2019 11:23 am
Location: New York

Re: Utility Stocks

Post by Robot Monster »

Dunno, but this is from an Oct 18th Wall Street Journal article, "Investors, Beware: Utility Stocks Could Become Less Predictable".
So far this year, utility stocks have lagged behind the broader market, hurt by a sharp drop in electricity demand in the first half of 2020 amid the coronavirus lockdowns. While the S&P 500 has returned around 8.25% year to date, the utility stocks in the index have fallen almost 1%. The S&P utilities sector had risen 33.7% from year end 2018 to the 2020 high set on Feb. 18.
"I think we may see a return to full employment next year." -- Janet Yellen, March 23rd 2021
Valuethinker
Posts: 42511
Joined: Fri May 11, 2007 11:07 am

Re: Utility Stocks

Post by Valuethinker »

dfw_north wrote: Sun Dec 27, 2020 12:29 am I wonder why utility stocks are trading @ a discount. SR, NJR, OGS etc. Considering low interest rates, it is surprising. What am I missing here? Thank you for for your answers...
How would you define "discount"?
Last I checked they were at historic PE highs. Historic P/ Book Value and historic Dividend/ Price lows

So not cheap at all.
jebmke
Posts: 12692
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: Utility Stocks

Post by jebmke »

Lower energy consumption? Utilities are generally high fixed cost industries so volume matters.
When you discover that you are riding a dead horse, the best strategy is to dismount.
tibbitts
Posts: 13610
Joined: Tue Feb 27, 2007 6:50 pm

Re: Utility Stocks

Post by tibbitts »

jebmke wrote: Sun Dec 27, 2020 10:25 am Lower energy consumption? Utilities are generally high fixed cost industries so volume matters.
On the other hand, if there is a nearly complete transition to electric power for all vehicles, maybe that will more than offset the savings from... I don't know, led vs. fluorescent bulbs?
User avatar
JoMoney
Posts: 11404
Joined: Tue Jul 23, 2013 5:31 am

Re: Utility Stocks

Post by JoMoney »

When I think of "Utility Stocks" the first thing that comes to mind for me, being in California, is "Isn't PG&E bankrupt?"
When I searched on that I see news articles about them recently "emerging from bankruptcy", looking at their stock (PCG) it appears shareholders weren't wiped out in that process/restructuring but maybe some new equity issue diluted things a bit.

The next thing that pops into my head, is utilities not being a "growth" company. There is a line of thinking with regard to stocks/businesses investment growth/value 'styles' being somewhat analogous to duration in bonds.
With bonds, when interest rates drop, you would rather have a bond promising to pay the previously higher interest rates. Preferably for as long as possible, ideally a 'zero coupon' bond where it's not paying out the interest every month (of which you can't reinvest at the same higher rate). A zero coupon bond would continue to compound at the interest rate it was issued at, which makes it more sensitive to interest rate changes, if rates drop it's more valuable.
Similar to the zero-coupon bond situation, some types of 'growth' stocks that can internally reinvest their earnings at a higher rate are more valuable then a business that might be spitting out cash but can't grow the business and the owner has to find something else to do with the money. If interest rates were rising, an investor might rather have the cash payouts that can be reinvested at now higher rates.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
User avatar
Hookem_1
Posts: 65
Joined: Thu Dec 17, 2020 7:27 pm

Re: Utility Stocks

Post by Hookem_1 »

Investors purchasing regulated utilities are basically buying a bond and looking for dividends. In most states, rates are regulated and the utility is allowed to recover their O&M costs plus a return on capital. The pandemic has changed the load shape for most all utilities in that work from home has caused an increase in retail and a reduction in commercial and industrial usage with flatter peaks. The drop in commercial and industrial is far greater than the increase in retail and my guess is that utilities are all seeing a drop in revenues which is putting pressure on dividend payouts. It will be interesting to see whether we get back to typical load shapes once vaccinations are more wide spread.
Topic Author
dfw_north
Posts: 17
Joined: Sat Feb 14, 2015 6:40 pm

Re: Utility Stocks

Post by dfw_north »

Thank you all for your time and answers...
Money Market
Posts: 178
Joined: Thu Mar 16, 2017 10:36 am

Re: Utility Stocks

Post by Money Market »

Good case study for justifying how the utilities sector has a lower correlation to the total stock market, and could be of use for diversification purposes.
VTSAX and chill.
User avatar
birdog
Posts: 1385
Joined: Fri Apr 07, 2017 1:35 pm
Location: Anytown, USA

Re: Utility Stocks

Post by birdog »

I noticed this a couple weeks ago when I was comparing VTI (total stock market) to VPU (utilities ETF). I thought it made the case to buy VPU if one were willing to make a sector bet.
User avatar
firebirdparts
Posts: 2490
Joined: Thu Jun 13, 2019 4:21 pm

Re: Utility Stocks

Post by firebirdparts »

I noticed it back in the summer. I have no explanation. I mean, who wouldn't want to invest in a monopoly when you can?
A fool and your money are soon partners
Rudedog
Posts: 327
Joined: Wed Aug 01, 2018 3:15 pm

Re: Utility Stocks

Post by Rudedog »

Happy New Year!
Last edited by Rudedog on Tue Dec 29, 2020 8:23 pm, edited 1 time in total.
User avatar
Top99%
Posts: 450
Joined: Sat Apr 22, 2017 9:30 am
Location: Austin, TX

Re: Utility Stocks

Post by Top99% »

I think part of it might be that markets tend to be forward looking and at some point when batteries or other storage technologies and solar panels get cheap enough first businesses and later consumers will generate their own power (or participate in microgrids) and eventually disconnect from the grid.
Adapt or perish
Valuethinker
Posts: 42511
Joined: Fri May 11, 2007 11:07 am

Re: Utility Stocks

Post by Valuethinker »

Rudedog wrote: Mon Dec 28, 2020 9:14 am I own several utility stocks, Duke, AEP, Dominion. The prices have been going up and down a bit recently. It appears that concerns about "going green" , restrictions on coal burning and future government environmental initiatives are holding down the stock price. Dividends appear to be safe, except Dominion dividend was just decreased, management justified decrease by attributing it to sale of part of the business last summer. Just my two cents.
Without doing much homework, you have massively tilted towards what look like the most coal dependent integrated generators?

Gas is cheaper than coal unless the coal fired power station has already had its cost written down ie existing rather than new capacity.

These are some of the utilities with the highest stranded asset risk. There are plenty of other utilities which do not have vertical integration and thus exposure to generation.


Was that deliberate? Your stock selection?
User avatar
patrick013
Posts: 3165
Joined: Mon Jul 13, 2015 7:49 pm

Re: Utility Stocks

Post by patrick013 »

The market portfolio (S&P 500) has the most available
economic info I can find. Before COVID Eps was over
130, during COVID it looks around 90 Eps. Prices are
either overbought or gauged to the future of economic
activity after COVID where earnings of 130 and higher
are expected, depending how you look at it.

Most dividend funds I follow are blue chip indexes and
payouts have been close to the same or slightly higher
including XLU and VPU. If previously bought then holding
these doesn't look very risky.

Inclined to buy AT&T at 7% with a BBB bond rating worries
some analysts but adventrous dividend stock holders own the
biggest phone company in the world where everybody has a
phone. That dividend they can't resist risky or not.

Ticker SO is trying to finish a new nuclear plant while
maintaining it's dividend. Nothing old fashioned there
for risk takers.
age in bonds, buy-and-hold, 10 year business cycle
Sam-I-Am-Not
Posts: 36
Joined: Sun Dec 20, 2020 11:50 am

Re: Utility Stocks

Post by Sam-I-Am-Not »

dfw_north wrote: Sun Dec 27, 2020 12:29 am I wonder why utility stocks are trading @ a discount. SR, NJR, OGS etc. Considering low interest rates, it is surprising. What am I missing here? Thank you for for your answers...
My understanding of utility stocks is that in a declining interest rate environment, they do very well. That is because those seeking yield will tend to purchase fewer bonds once the yield on utility stocks is higher and some will switch over to utilities. However, at the moment we are in an interest rate freeze with rates unlikely to drop further. In fact, if and when the economy heats up and interest rates start to increase, those seeking yield may sell some utilities to pursue higher yield (interest) being paid on newly issued bonds. The federal reserve does not seem inclined to allow interest rates to increase for the foreseeable future. But eventually they will and this could lead to a price decline in the NAV of utilities funds. I own a small amount of VPU, the V.Utility ETF. I hold this small amount, along with a small amount of VGSLX, the V.Real Estate Index Fund to act as a small "alternative invest" sleeve within my more conventional portfolio. I plan to keep my small allocation even though the sector, along with VGSLX is down trodden at the moment. They are serving a purpose in my overall portfolio, though I do dislike seeming them out of favor. I know they will be back in favor at some time.
Post Reply