Utility stocks turn risky, but bargains exist

May 11, 1994|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Love me, love my electric utility stock.

That's been the sentiment of conservative older investors whose passion for yield-producing holdings usually endures for decades. The average electric utility dividend yield, after all, is a hefty 6.7 percent.

This love affair may be ending.

Down more than 20 percent in value from their all-time high set last fall, electric utility stocks have been severely wounded by rising interest rates.

Admittedly, the worst is now probably over in terms of rate concerns. Many experts believe long-term rates aren't going anywhere, and others expect they will actually decline if the Federal Reserve boosts short-term rates further.

But of much greater concern is ongoing industry deregulation, which renders these stocks considerably less of a sure thing.

California utility regulators, traditionally on the cutting edge, recently proposed changes to permit all that state's customers to buy electrical power from providers other than traditional utilities if they wish.

This option would begin in 1996 with large industrial customers, expanding to all customers by the turn of the century. Electric utilities would retain power transmission responsibilities.

"Electric utilities will become more risky, changing the perception of them as defensive vehicles," warned James McFadden, analyst with Bear Stearns.

Worried shareholders may be switching to real estate investment trusts, telephone utility stocks or the safety of principal offered by bank certificates that now feature higher yields.

At the very least, investors should get out of the less trustworthy electric utilities and into those of higher quality.

"Quality of management of an electric utility is becoming more important as we enter the unknown," said Barry Abramson, analyst with Prudential Securities.

A more optimistic Mark Luftig, analyst with Kemper Securities, doesn't believe changes will occur so quickly. He doesn't expect all proposed provisions will be retained either.

"I'd diversify and not put too much money in any one regional regulatory jurisdiction, but I think electric utility management is getting sharper in dealing with change," counseled Luftig.

There remain some attractively priced choices.

* Entergy Corp. (dividend yield just under 6 percent) is recommended by all three analysts. It has diversity of territory with five subsidiaries supplying electricity to portions of five southern states. The company recently finalized its merger with Gulf States Utilities.

* PacifiCorp (6 percent yield) is a low-risk favorite of Abramson and Luftig. A low-cost power producer with no nuclear facilities, PacifiCorp serves nine western states.

* CMS Energy Corp. (yield just over 3 percent) is suggested by Abramson and McFadden. A supplier of electricity and gas to lower Michigan, excluding Detroit, CMS features a good earnings stream.

* Meanwhile, The Southern Co. (6 percent yield), serving four southern states, is recommended by Abramson. So is General Public Utilities (just under 6 percent), operating in Pennsylvania and New Jersey.

* PSI Resources (5.5 percent yield), now in central and southern Indiana and merging with Cincinnati Gas & Electric, is a McFadden favorite. Another is Oklahoma Gas & Electric (just under 8 percent).

* Public Service of Colorado (yield just under 7 percent) is a Luftig pick, along with TECO Energy (just over 5 percent), holding company for Tampa Electric.

Some selling is suggested. Northeast Utilities and Central & South West would be "avoided" by McFadden, while Abramson would unload Potomac Electric Power and Delmarva Power & Light.

There are differences of opinion.

For example, Commonwealth Edison would be sold by Luftig because of concern over its upcoming year-end rate decision, while McFadden, more confident about the outcome, would hold. McFadden would "move away" from Consolidated Edison because regulators are getting tougher and demographics aren't great, but Luftig would buy because the price is right.

SCEcorp (just over 9 percent), parent of Southern California Edison, is a Luftig recommendation because its dividend will stay in effect through year-end, yet Abramson would sell because of regulatory concerns.

Tucson Electric Power (no dividend) would be sold by McFadden because it won't have a dividend until the year 2000, but Luftig would buy and patiently put it aside for three years.

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