The Best Opportunities in Utilities
01/09/2012 11:00 am EST
Roger, talk about where you see the best opportunities in utilities right now.
Well, I like utilities now for a couple of reasons. One, I think we’re in kind of a sluggish growth environment—some areas of the country doing well, some areas not so well—and these companies have been producing or providing essential services, very strong revenue security.
Also for the past ten years, they’ve been heavily deleveraging in almost in an unprecedented way. That, of course, was the result of things that got pretty bad in 2001 and 2002, with the collapse of Enron, but management is very conservative. That’s a good thing. You want conservatively-run companies, good balance sheets, very reliable revenue, and dividends are pretty high.
We’re also actually seeing a return to dividend growth in many areas, and so I like the group. I think there is a tremendous opportunity for growth as well. I’ll always want to have investments in dividend-paying stocks that have the ability to grow the dividend. There’s no better guarantor of dividend safety, whether you’re talking about inflation or credit risk.
So you have these opportunities in things like water, power generation, the fact that our power grid is aging and is in dire need of investment, communications, the explosion of connectivity, wireless networks, and so forth. These are all huge opportunities that kind of transcend what’s going on in the economy, so you have a really nice package. You’re getting safety income and growth that you don’t really find anywhere else.
Is the growth coming from consumer-residential households, wireless, cell phones...where do you see it most?
When you’re talking about these types of industries, you talk about big companies with a lot of capital spending, and that’s really what drives growth.
The more capital spending, say, a power company does—if it can get those capitals to earn a return on that, whether it be in a regulated way through customer rates or say a contract of some sort—that adds to their cash flow, that adds to their ability to pay a bigger dividend, and the share prices will follow along behind those dividends as dividends grow.
So there again, in all these areas there are trillions of dollars that are going to be spent over the next ten to 15 years that are very, very reliable with these big projects, a lot of visibility, a lot of ability to look down the road and say, “Here’s what this company’s earnings are going to be in five years.” Because they’ve got a pipeline of projects that’s going to produce that income.
Any specific tickers or companies that you like?
Well, I like Dominion Resources (D) for conservative investors. I like it because it has a tremendous opportunity in electricity in Virginia, where power demand is supposed to be roughly twice the national rate over the next ten years, and that’s because it’s becoming a real information center, very electricity intensive-type of business.
At the same time, they also have a lot of natural-gas pipelines, particularly in the Marcellus Shale, which is sort of the next big development area. These pipelines give it tremendous opportunity to move gas out of there.
They also own a liquefied natural gas facility that can potentially be used for export of natural gas, which has been kind of a Holy Grail for the industry—European gas prices are roughly three times what they are here.
It's a big opportunity, and I think, again, they’re just building infrastructure. As they build these major projects, and bring them online, they earn a return, higher cash flow, higher dividends, and higher share price.