Industry changes taking zap out of electric utilities

Andrew Leckey

October 27, 1993|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Preferring the fireworks of megabuck technology and communications mergers, many investors are switching off electric utilities.

This conservative stock group is up about 12 percent this year, but had been up 17 percent before investors began taking profits.

No longer are all electric utilities alike, for some will cope better with the trend to deregulation and competitive pricing. Nor can interest rates be counted on to continue falling, a trend that not only helped the industry's bottom line, but made its dividend yields attractive.

"Nuclear power is costing more than envisioned, and other fundamentals are deteriorating," warned James McFadden, an analyst with Bear Stearns.

There's more: "Although most electric utilities don't need rate increases, those that do will face a difficult regulatory environment," said Elizabeth Moore, an analyst with Donaldson Lufkin & Jenrette.

Investors must be picky.

For example, PSI Resources, with dividend yield of about 4 percent, is to be acquired by Cincinnati Gas & Electric in a friendly deal that could receive regulatory approval by mid-1994. Mr. McFadden and Ms. Moore recommend PSI stock because shareholders could wind up with a 20 percent annual total return with little risk.

"Unfortunately, we're entering a secular change in the industry, which could face several years of earnings pessimism," said Barry Abramson, an analyst with Prudential Securities. Leonard Hyman, an analyst with Merrill Lynch & Co., noted that "last year was a poor year for utilities mostly due to weather, and this one has been better due to weather."

So, while most electric utility stocks should probably be held for the time being, others must be unloaded.

For example, sell Centerior Energy, which has cost-structure problems, no dividend growth and its subsidiaries' bonds under re-evaluation by Standard & Poor's, advised Mr. Abramson, Ms. Moore and Mr. Hyman.

U.S. electric utilities offer an average yield of 5 percent, with expected 2 percent price appreciation, for an annual total return of 7 percent. Some analysts see better prospects in riskier foreign utilities, with yields around 3 percent but growth rates of 10 percent to 20 percent.

Among those traded as American depositary receipts, Mr. McFadden recommends China Light & Power and Hong Kong Electric. From Britain, he likes National Power and PowerGen. Mr. Abramson prefers Endesa of Spain, that nation's largest electric utility.

There are other domestic live wires and duds.

Dominion Resources (yield around 5 percent), which is conservative with an excellent cost structure, is recommended by Mr. Abramson and Mr. Hyman. Pinnacle West Capital (no dividend) is inexpensive, about to reimpose its dividend and likely to enjoy 10 percent annual growth, Mr. McFadden believes.

High-yield choices from Mr. McFadden are Long Island Lighting (around 7 percent), thanks to an improved New York regulatory climate, and Northeast Utilities (around 6.5 percent), which may boost its dividend on improvement in the economy or weather.

Among smaller utilities, he likes United Illuminating (around 6 percent), whose dividend will grow on improved earnings, and Eastern Utility Associates (around 5 percent), stronger because of the absence of legal costs from its Seabrook nuclear plant and the help of 1992 rate increases.

Low-cost producers expected to boost dividends, Mr. Abramson believes, include Southern Co. (around 5 percent), Niagara Mohawk Power (around 4.5 percent), Pacific Corp. (around 5.5 percent) and Union Electric (around 5.5 percent). His turnaround pick is Commonwealth Edison (around 5.5 percent), whose stock is a value based on improving earnings because of cost-cutting.

Philadelphia Electric (around 4.5 percent), strong financially, is a Ms. Moore choice, while Central & Southwest (around 5 percent), a low-cost producer considering selling power in Mexico, is a Mr. Hyman selection.

But Delmarva Power & Light, which just lost some major customers, should be sold, say Mr. McFadden and Mr. Abramson. Others with no growth or slow growth include Tucson Electric Power, American Electric Power and Nevada Power, said Mr. McFadden.

Sell Oklahoma Gas & Electric and carefully monitor Ohio Edison because of its high payout, high rates and "restless" industrial customers, said Mr. Abramson. SCEcorp, facing cancellation of a large project and no expected dividend growth, should also under-perform, Ms. Moore predicted.

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