Utilities Set to Pale in Comparison
Though utilities stocks are far from being in dire straits, their relative underperformance is likely to continue as long as the bigger-picture economic recovery continues to take root. In simplest terms, even the very best utilities providers have less upside potential than the weakest of the market’s opportunities in other sectors.
Utility Stocks Lagging: Year-to-date, utilities stocks are up about 5.7%, which is certainly better than a loss, but well behind the S&P 500’s 20.5% gain for the same period. Technology stocks are up 46.3%. Yes, different sectors fall in and out of favor, but after nine months of lagging it’s hard to dismiss the disparity as ‘a little volatility’.
Why the difference? Investors think aggressively in bull markets, and conservatively in bear markets… and utilities are hardly aggressive. Despite all the worries otherwise, the evidence does indeed point to an improving economy; utility stocks just aren’t apt to attract investment dollars.
Worst Case Scenario on Most Fronts: Even without an economic recovery in place, utility companies are facing several challenges.
Take electricity and natural gas prices for instance. Higher prices generally mean better margins for providers. With pricing lower than it was a year ago (and likely to stay low for a while), profit rates aren’t going to be as attractive as they have been in recent years.
Simultaneously, a slowdown in new construction coupled with an overzealous increase in the industry’s capacity prior to 2008 now has these companies “all dressed up and no place to go”. Unused capacity also hurts margins.
What They’re Still Good For: Granted, all the drawbacks cited so far are from a growth investor’s perspective. Growth isn’t the only reason to own a utility stock though. These names still offer something the rest of the market rally can’t…. decent, reliable dividends. Southern Company (SO) is yielding 5.5%, while Progress Energy’s (PGN) current yield is a solid 6.3%. If income is the primary need, then these stocks still do their job well.
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