Back to the Excitement of Boring Stocks
12/14/2010 2:47 pm EST
Nuclear plant operator Exelon is just one utility benefiting from the gradual economic recovery, writes Roger Conrad, editor of Utility Forecaster.
The most recent earnings results for the companies I follow demonstrate pretty clearly that the economic recovery over the past 12 to 18 months is continuing. The pace is akin to watching paint dry and, judging from the results of last month's election, isn’t nearly fast enough for most people.
Nonetheless, it does all but rule out what investors have feared most since the stock market recovery began in March 2009: another 2008 debacle where credit freezes up, the economy goes into full reverse and the bottom drops out for everything but US Treasury bonds.
Among the evidence in the numbers from our companies: the continuation of record-low borrowing rates, continued progress of capital projects, and a general acceleration of spending, a boost in energy sales to industry, faster customer growth for regulated utilities, and continued robust growth in data service revenue for communications companies.
In recent days many investors and analysts have become focused on the Federal Reserve’s loose-money policy, so-called quantitative easing. That may indeed at some point trigger inflation pressures in the US, and even globally. And it’s led some to bid up commodity prices, particularly gold.
No Jobs, No Inflation
At this point, however, raw materials prices are about the only prospective trigger for inflation. Mainly, there can be no wage-push inflation with unemployment in the US still nearly 10% and joblessness even higher in other countries. And wages were a very big part of what happened in the 1970s.
One of the benefits of focusing on essential-services companies is the inherent stability of their underlying businesses. Water, electric power, communications, and energy, for example, have felt some impact from the economic slowdown, and the fact that activity remains below pre-2008 crash rates across the board in North America.
All of them, however, remained generally steady as businesses. There were very few dividend or credit rating cuts. In fact, most companies continued to raise their payouts, as well as accelerate expansion plans. That’s been a stark contrast with the debacle of 2001-02, which was far easier on the overall economy but much harder for essential-service companies.
A Safe and Growing 5% Yield
Even Exelon (NYSE: EXC), whose nuclear output is hurt by lower gas prices in the Middle Atlantic and Midwest states, has actually been raising its profit outlook this year, as it locks in output at good prices and improves efficiency of its units. It would do a lot better if gas prices revived or the federal government imposed limits on greenhouse gases. But neither is the company a one-trick pony, and its yield of well over 5% is both safe and likely to grow robustly in coming years.
[With the sector so flush, mergers loom on the horizon. Conrad recently named three utilities attractive takeover targets—Editor.]