Glow dims in utilities

Donald Saltz

August 02, 1991|By Donald Saltz

Time was when conservative investors flocked to buy shares of utility companies. That time isn't now.

Utility stocks haven't lost all of their appeal, and large portions of gas, electric and water companies continue to be owned by investors who like the prospect of dividend increases over a period of time. For many folks, though, the utilities have lost their punch.

Slow growth in utilities' profits and dividends has disheartened many investors who have turned to bonds, where the yields are considerably better. Although many utility firms maintain a reputation for regular dividend increases, those boosts are usually small and years would have to pass for the dividend return to top the current bond yields.

Holders of utility stocks have problems other than very modest dividend increases. The companies often find it difficult to win regulatory approval for what they consider adequate rates, thus earnings suffer. The high cost of new plant construction is a factor. Also, dividend reinvestment plans keep adding more shares, making per-share earnings gains more difficult and cutting into the size of dividend increases.

Some gas and electric utilities have found it necessary to reduce or even eliminate their dividend payouts.

The Philadelphia Electric Co., for example, last year slashed its dividend rate from $2.20 a share annually to $1.20, in one move wiping out decades of small dividend increases, a result of construction expenses. Pinacle West Capital, the holding company for Arizona Public Service of Phoenix, dropped its dividend entirely as earnings tumbled, due primarily to heavy losses at a bank owned by the company.

Utilities doing business in Maryland haven't been so severely affected -- dividends remain intact or higher -- but the stocks are not especially appealing when considering alternatives.

The Delmarva Power & Light Co., a Delaware-based firm that serves Maryland's Eastern Shore, raises its dividend modestly every year -- it yields 8 percent -- but per-share earnings haven't gone anywhere in a decade. The stock is currently trading near $19.

Baltimore Gas & Electric Co. is almost $30, near its year-long high. However, earnings have failed to hold their own. The stock yields 7 percent but the lack of earnings growth hurts. BG&E, which most recently raised its dividend two years ago, earned $2.35 a share in the latest four quarters and per-share earnings are at their lowest ebb since the early 1980s. This current close coverage of the $2.10 dividend rate concerns the shareholder who realizes that a further decline in earnings could even lead to a dividend reduction.

However, it isn't only the risk in the dividend that has diverted many investors from utility stocks to mutual bond funds. The bond returns are substantially larger.

Baltimore-based T. Rowe Price has a tax-free fund of Maryland bonds -- dividends are exempt from federal and Maryland state taxes -- that yields slightly more than 6 percent. Although the yield pleases investors, they especially like the fund's price stability. The share price has ranged from $9.24 to $9.69 in a period of more than one-and-a-half years, only a 5 percent swing.

Price's taxable bond funds also appeal to typical utility stock investors because, after all, utility dividends are taxed. Yields range upward from about 8 percent in funds of higher-quality bonds.

General stock mutual funds, or individual stocks whose dividends are rising rapidly, are appealing more and more to investors who are concerned about maintaining the value of their holdings. All of this does not mean that the typical long-term investor has abandoned utility shares. But just as cable television and videos have cut into TV network viewing, so have other forms of investment dipped into what was once the backbone of the conservative stock investor -- shares of gas and electric companies.

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