Utility Duo: Defense Against Deflation

09/01/2015 7:00 am EST


Richard Stavros

Analyst, Global Income Edge, Utility Forecaster and Personal Finance

We have long believed a long-term deflationary trend has been inevitable based on the amounts of debt that is being held by governments around the world and the fact they are not growing fast enough to pay it down, observes Richard Stavros, editor of Global Income Edge.

And with the latest market declines, the long-term and short-term deflationary trends all point to investing in regulated utilities.

These can pass on the impact of deflation and profit changes to their customers in the form of higher (or lower) prices. 

Utilities are so resilient because when deflation reduces discretionary, people can’t skimp on electric power. It’s an essential service for which consumers will continue to spend.

So which domestic and international utility makes the best investments during periods of deflation?

In selecting the ideal international and domestic anti-deflation investment, we chose core National Grid (NGG) and Southern Company (SO).

Both are headquartered in countries with good regulation for utility profits. Southern in the United States and National Grid in the United Kingdom.

National Grid offers a stable 5.14% yield with strong international diversification. Based on its operating earnings in 2013, about 65% of its operations are based in the UK and 35% are in the US.

Southern Company is headquartered in Atlanta and operates in Georgia, Alabama, Florida, and Mississippi.

The company is involved in generation, transmission, and distribution of electricity through coal, nuclear, oil and gas, and hydro resources. The company also owns renewable energy projects. 

Given the firm’s size and scale, during a deflationary period, we believe Southern Co. would be able to count on its regulatory relationship to continue to deliver earnings where other non-defensive firms would be forced to scale back.

Southern has steadily hiked its dividend, with payout growth averaging 3.7% annually over the past five years. SO is a buy below $55.

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