Electric utilities provide shelter from low yields

Andrew Leckey

October 21, 1992|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Batten down the hatches. Some shelter from low interest yields and persistent stock market gyrations is still available in 1992 in the form of good old electric utility stocks.

Many investors fleeing low certificate of deposit rates or bouncing stock prices have lately turned to these stable high-yield choices in increasing numbers. Judging from letters received, the readers of this column can't seem to get enough utility stock recommendations these days.

"With certificate of deposit money yielding around 3.5 percent, the average yield of more than 6 percent for the group of 80 utilities I cover certainly looks good," observed Bert Kramer, utilities analyst for PaineWebber Inc., who considers utilities a cross between a bond and stock because they offer current yield and some growth.

"Low inflation and slow growth are basically good for utilities, and, while we've had a few companies omit their dividend, there are still plenty of good choices left."

It's important to remember that all electric utilities are not alike, and that if a yield seems too good to be true, it probably is.

"The individual investor doesn't realize how selective he must be with this industry, since you simply can't go out and buy any utility stock assuming it's a safe haven," warned Douglas Preiser, utility analyst for Kidder, Peabody & Co. "You must be cautious about companies with extremely high payout ratios, those with little prospects for earnings growth and those that aren't in competitive situations."

The current fundamentals for the industry won't exactly wow you. Electric utilities haven't had a strong gain in earnings in five years, they aren't being allowed as high returns as they once were and they aren't building new plants, Preiser pointed out. An increase in inflation or interest rates would be tough on the group in light of all those factors, he believes.

Furthermore, new energy legislation will be extremely hard on any utilities that are higher-cost producers, since competition will be increased. With those caveats, some excellent investment choices still remain among these stocks.

For investors with CD money who have a two- to four-year outlook, the stock of NIPSCO Industries (recently a 4.7 percent yield), Wisconsin Energy Corp. (4.9 percent) and TECO Energy (4.5 percent) is recommended by Kramer. These excellent companies all feature likely annual dividend increases and solid fundamentals. He'd avoid the high-yield stock of Centerior Energy (8.5 percent) and Long Island Lighting (7.3 percent), since new energy legislation will make life more difficult for them.

Philadelphia Electric (5.1 percent yield), Entergy Corp. (4.6 percent), DQE Inc. (4.8 percent) and Southern Co. (5.9 percent) are the prime stock picks of Preiser.

On the other hand, he doesn't like the stock of American Electric Power (7.4 percent), Idaho Power (7 percent), Allegheny Power (6.9 percent) Systems or Washington Water Power (7.1 percent).

The stock of Commonwealth Edison (7.3 percent yield), in Kramer's mind, still has too many question marks.

Standard & Poor's Corp. recommends the stock of NIPSCO, TECO, Entergy and Wisconsin Energy previously mentioned. It also suggests the following electric utilities:

* Central & Southwest (5.4 percent yield), serving customers in Texas, Oklahoma, Louisiana and Arkansas, which has a strong cash flow and is expected to gain due to an improved Texas economy.

* Dominion Resources (6.3 percent), which should benefit long-term from the strong regional economy of Virginia and North Carolina, its stock providing a solid total return.

* Duke Power (5.1 percent), a well-managed utility in the Carolinas which, despite recent minor regulatory setbacks, has promising earnings and dividend prospects.

* New England Electric (6.2 percent), serving Massachusetts, Rhode Island and New Hampshire, which is expected to profit from improved economic activity in New England.

* Pacific Gas & Electric (5.6 percent), with 12.1 million customers in northern and central California, which will see prospects enhanced by performance-based pricing at its Diablo Canyon nuclear facility and a reasonably favorable regulatory environment.

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