Utility stocks, ahead of the crowd lately, still look good
Investors who were plugged into the utility stocks over the past year have managed to keep their investments well charged.
While the Dow Jones industrial average lost about 8 percent for the first three months of the year, the utility average has gained 5.2 percent. And last year, when the Dow was losing 11.2 percent, the utilities were climbing 5.1 percent.
Investors have long considered utilities a good ''defensive'' pick during a bear market, since yields on the stocks are historically higher than those of riskier securities. Investors' interest has also been piqued because utilities have benefited from lower interest and inflation rates and changes in the tax law. Furthermore, this spring, as Leonard S. Hyman, a vice-president at Merrill Lynch, Pierce, Fenner & Smith, notes, electric utility investors are hopeful that regulation is improving, capital spending is slowing down, and activity is picking up at the Nuclear Regulatory Commission (NCR).
Now Mr. Hyman, in a report to the big broker's institutional customers, is warning investors not to get ''excessively exuberant'' about the companies. He comments: ''The pace of improvement will be slow, and some companies will do far better than others. What looks good now, while the economy is on its back, may not look so great once the recovery starts.''
Howard Shaff, a vice-president at A. G. Becker Inc., agrees, adding that once the stock market turns around, ''we will see their favor relative to more volatile stocks become somewhat diminished.'' But he also suspects that ''we will see them in favor for a while longer with inflation staying down and interest rates likely to come down some more.''
Many utility analysts, in fact, would agree with John Slatter, vice-president at Prescott, Ball & Turben, a Cleveland-based brokerage house, who says, ''The utility stocks move more on interest rates than any other factor.'' He points out that the utilities spend billions on new power plants. Thus, when interest rates move lower, their borrowing costs shrink. Also, analyst Donald S. Mishara of Bear, Stearns & Co. notes that as long-term bond rates fall, the yields on utility stocks look more attractive.
Bear, Stearns is estimating that 30-year AA-rated bond rates will drop from a current 16 percent level to 13.5 percent by the fourth quarter of the year. Allowing for an annual dividend growth of 5 percent, the firm estimates stock prices could grow another 15 percent this year to maintain their historical relationship to bond yields.
To some of the analysts, one of the more positive shifts recently has been in regulatory attitudes. As Bear, Stearns notes, the average return on equity allowed by states in 1981 averaged 15.19 percent, up from 14.21 percent in 1980 and 13.46 percent in 1979. Even more important for the long term, the quality of the regulators has improved, says Hyman. Regulators recognize the major problems utilities now face: bringing returns in line with current market conditions; complying with the 1981 tax law; and trying to facilitate completion of big power projects.
Unfortunately, Hyman notes, the improvement on the local level has not been matched in Washington with the nuclear industry. He concludes, ''We do not believe that either the NRC or the nuclear industry has its act together.'' He suggests investors diversify their portfolios to ensure against results of any nuclear mishap.
Most analysts, in fact, suggest investors buy utility stocks only selectively. Mr. Shaff comments, ''The institutions prefer the so-called high-quality utilities, those which are financially strong and increase their dividends on a regular and significant basis.'' Shaff's recommendations are Northern States Power, Wisconsin Electric Power, Southern California Edison, Duke Power, and Public Service Electric & Gas (N.J.).
Mr. Slatter's recommendations are Central & Southwest; Wisconsin Public Service, which he notes has recently completed a major construction program and will need no new plants until 1992; Southern Indiana Gas & Electric; New England Electric Systems; Teco Energy (formerly Tampa Electric); and Baltimore Gas & Electric.
On the basis of total return, over the intermediate term Bear, Stearns is recommending that its clients buy Indianapolis Power & Light and Wisconsin Power & Light. On the basis of income, the firm likes American Electric Power, Central Illinois Public Service, Cleveland Electric, Commonwealth Edison, and Northern Indiana Public Service.
Investors buying utilities might also keep in mind that many of them qualify for the dividend deferment plan passed by Congress last year. The utility investor may defer taxes between 1982 and '85 on up to $750 ($1,500 on joint returns) on dividends reinvested in new-issue stock of qualifying utilities.
Currency traders calling Morgan Guaranty Trust Company's morning currency review were surprised on Thursday to hear the big bank somberly announce that Paul Volcker, ''in a surprise move,'' had succeeded President Reagan. The telephone tape went on to report that Mr. Volcker had vowed to strengthen a ''weakened dollar'' by early May. Had Morgan gotten some inside news? A glance at the calendar gave away the answer: ''April Fool's Day.''
The market continued on firmer ground last week, pushing upward for the second consecutive week. The Dow Jones industrial average climbed 20.65 points, closing at 838.57. Roy Blumberg, a technical analyst with A.G. Becker Inc., sent out a wire to the firm's customers suggesting the rally could continue a few more weeks. Strong groups, he noted, were entertainment, publishing, communications equipment, restaurants, textiles, and telephone companies. Weak groups have included aerospace, aluminums, autos, brokerages, chemicals, oils, steels, rails, and papers.