Utility Expert Goes Global

10/10/2016 10:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Utility sector expert Roger Conrad sees upside in select stocks in the utility sector; here the editor of Conrad's Utility Investor discusses the state of the utility markets and highlights a pair of global favorites.

Steve Halpern:  Our guest today is the advisory industries leading expert on the utility sector and on income investing, Roger Conrad, editor of Capitalist Times and Conrad's Utility Investor.  How are you doing today?

Roger Conrad:  Great Steve, how are you?

Steve Halpern:  Very good.  Thanks for taking the time.  Now, as a guiding strategy you argue that patiently buying and holding shares of high quality dividend payers is the shortest route to sustainable wealth.  Could you explain that?

Roger Conrad:  Well, this is a path that I've been following, a strategy that I've been following personally for many years.  

Basically the idea is you have a good company in an industry that is growing its earnings, it's growing its presence, and as it grows those earnings it grows its dividends along with them.  Then the share prices follow those dividends higher over time.  

That doesn't mean that prices don't go up and down, and particularly in the course of normal market volatility.  In fact, with the rise of exchange-traded funds in particular, and the fact that a lot of people don't buy individual stocks any more there is a lot more volatility.  

You still see the same pattern.  You still see good companies, and I prefer the essential businesses which are companies that produce electricity, or heat, or communications, or water those types of things.  

We need them, they're more essential to a functioning economy than ever before, and they continue to get more so I think every year.  

It's a good kind of business to be in, you've got kind of that steady underlying growth.  I think the utilities, and the essential service businesses are probably in the best shape that at least as businesses that they've been in in at least 40 years.  

Really you have to look back to the 1960s where you had balance sheets this strong.  Where you had businesses this poised for growth, and also having good relations with regulators.  

I think this is a very positive time for that.  The offset I guess right now is high prices, very, very high valuations for a lot of dividend paying stocks.  

I don't like to pay that much, and in fact we have seen major corrections when we've seen prices get this high.  I think it's a time to be cautious.  It's a time where I'm looking to buy good companies at good prices.  

In fact, some of the market action where we've seen prices coming off, to me I think is very promising that we're going to get those good entry points at some point in the next three to six months.

Steve Halpern:  There have been a number of headwinds facing the global utilities, and a number of investors have pulled away from that area, but you see some opportunity there.  Can you highlight some of the drivers of the local utility sector?

Roger Conrad:  I guess that's pretty common knowledge that many of the economies around the world are growing faster.  Developing world economies are growing faster than the US.  The US has been kind of a bright spot in recent years, believe it or not, even though our growth has been on the sluggish side.  

It's been an environment of soft global growth, and as you mentioned that's been a headwind for global stocks of all sorts.  Utilities, as well, because they're really tied into the growth of industries.  I think what we are starting to see is a renewed investment boom, particularly in certain markets that have tremendous potential such as China.  

They have these five year plans that basically involve pushing hundreds of billions of dollars in certain directions, and right now you're seeing a big investment there that are going to help the air and water.  Things like renewable energy, and things like equipment to help their coal plants emit less emissions.  

Electrifying their economy by, a lot of people don't realize, but many Chinese use coal to actually cook with so a lot of challenges there.  They're not the only country facing those, and the result is a pretty nice investment.  

The other big headwind that's hurt people in foreign stocks in general and foreign utilities as well is the currency situation.  We've had a tremendously strong US dollar.  These things tend to be very cyclical.  I think at this point you see currencies like the Canadian dollar against the US dollar.  

Currencies like the Australian dollar that are pretty much down to levels that we haven't seen in several decades.  I think that's a big opportunity because if you are able to spend US dollars to buy these stocks, then benefit from perhaps currency appreciation against the US dollar in coming years.  You can really do quite well.  

Something of a reversal of what we've seen over the last several years where that's actually been working against US investors.  I see a lot of opportunity based on those two things.  A lot of the yields are pretty high.  Particularly Canada has a really long term history of paying big dividends.  I think there is a lot of risk out there.  

One of the markets I'm pretty cautious on right now is actually the UK.  A market that I've liked for a number of years, but the regulatory situation has really been turned on its ear by the upending of the ruling party government there.  

I'm a little bit worried about that, but I do see a lot of opportunity.  Again prices are pretty low, and it looks like we're seeing a real upturn in terms of potential growth.

Steve Halpern:  We've got time to look at a couple of stocks, and one that you favor currently is Brookfield Renewable Energy Partners (BEP), which is a limited partnership.  What's the attraction there?

Roger Conrad:  Well, this one just basically owns contracted power plants, and they're all hydro or wind.  In other words the focus is on sources of energy that don't burn fossil fuels, and basically then are immune from a lot of the environmental regulation that we see mounting around the world.  Including in fairly conservative countries as well.  

What they're able to do is go in with the superior cost of capital that their parent Brookfield Asset Management has, and make acquisitions around the world.  

They basically lock in revenues when they do that.  They lock in cash flow, they increase their dividend.  Their dividend has been rising at an upper single digit rate every year.  It's around 5% or 6% is where it's been typically yielding.  

I think it's at a pretty good price right now.  It's priced in Canadian dollars.  You do have the option of taking a dividend in US dollars so that eliminates some of the currency concerns investors have.

This is a really good conservative way to play, again what looks like to be a pretty immutable trend around the world which is a push towards sources of electricity that don't create as many air pollution problems.  

You notice I'm leaving aside the carbon dioxide issue which is controversial in this country, but around the world it's really starting to pick up steam.  

You're seeing again a big investment in these areas, and companies like Brookfield that own these types of power facilities really have I wouldn't say an easy way to growth, but it's a very assured road to growth.  All they really have to do is execute deals, and the facilities that they have efficiently.  

Hydro is actually an extremely cheap source of energy that doesn't really get a lot of credit, but there are ways that companies like Brookfield can increase the power production of dams, really cut costs, and they're maximizing the investment in these facilities as well.  

Which are far cheaper to run than pretty much anything out there even with natural gas at the levels that we see right now.  Hydro is at the top of the list in terms of cost.  

That advantage, I think, is going to continue to grow going forward.  Again with the emphasis on clean air, clean water, and increasingly carbon dioxide, and so forth, those types of concerns.

Steve Halpern:  Also in the energy sector you like Total (TOT), in part due to its solar power and energy storage business.  We only have a minute, but could you walk us through what you like in this situation.

Roger Conrad:  That may sound in congress because this is a super oil, they made this, and it's producing oil and gas.  They're also really rolling with the punches of the energy market.  

As you said they're involved in a lot of areas that are growing very rapidly, particularly in developing areas of the world such as Africa.  

It's got a nice dividend that's been knocked down a bit by the fact of lower energy prices, but I think it's a winner in a lower for longer energy price environment.  

Like you say it's a big investor in things like energy storage that are really going to open up markets and revenues for it going forward.

Steve Halpern:  Again our guest is Roger Conrad of Conrad's Utility Investor.  Thank you so much for your time today.

Roger Conrad:  Thank you Steve.

By Roger Conrad, Editor of Conrad's Utility Investor

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