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Post by retiredat48 on Mar 24, 2022 17:32:16 GMT
I asked two questions on the Buys/Sells/Why Forum (where some were buying utilities mutual funds/etfs) for those investing in Utilities:
and I would discuss in a new thread on utilities, if anyone interested. Investors expressed interest in a new thread.
OK...I have invested in utilities at times over the last five decades, and here is my experience, and what I see as potential headwinds in owning utilities now:
1) UTILITIES DO POORLY IN HIGH CAP X SPENDING PERIODS. Whereas the country is moving from gas engines to electric vehicles, and whereas such vehicles get recharged using electricity, and whereas this ADDITION of electrical generation must come from new facilities, does this not mean that utilities will be spending the next two decades spending a lot of cash (CAP X) on build-outs of new generation plants. Leaving little to pay dividend increases. Utes are highly regulated, and the theme to spend more will be strong. There is a double-whammy at play: Cap X is needed to "go green"...and needed simply because of rising demand for electricity (and backup generation).
2) UTILITIES DO NOT DO WELL IN INFLATIONARY TIMES. With low inflation, low interest rates, utes have higher dividend yields than bonds, and do well in such stable times. Inflation is another matter...with both rising rates and a "real" decline in the value of the dividend. Utility regulators will side with customers and not allow dividend increases easily.
3) "PROGRESSIVE THEMES ARE NOT GOOD FOR UTILITY OUTLOOK. Inflation means utilities, to keep up, will have to raise prices to enable increasing dividend payouts. Such pricing will be met with strong backlash from customers and Liz Warren types. Like, regulators will say: "you can't ever increase dividends again as utilities, as you have made your money on initial investments...so stop asking for rate increases." Sorta like "rent control arguments" in blue states. Second, the need for capX spending will further mean no divy increases, as progressives demand new green power sources.
4) REGULATOR APPROVED INCREASES OFTEN SHORT OF ACTUAL EXPENSES. Cap X spending is usually underestimated, especially in inflationary times. Utes will not only be forced to "go green", but will also have to build backup carbon-based power plants. Currently electricity cannot be stored in large amounts. So backups crucial. The spending is often short of needs. Also, stuff happens, cost are expended, and the request to regulators for cost coverage (and especially divy increases) fall on deaf ears.
Bottom line: Utilities will be burdened with inflation, cap X spending, cost increases, unfavorable regulators, and SHOCKED/UNRULY CUSTOMERS...shocked this year at the increase in their utility bills for gas fired plants etc. With inflation, your stable/frozen yields become worth less and less...and you have to compete with corporate and gvt treasury bond yields going up and up. All headwinds for utilities.
Good luck all...open for discussion.
R48
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Post by win1177 on Mar 24, 2022 19:21:43 GMT
Thanks for starting the thread R48! I am being very cautious in terms of adding to utilities, for the reasons you mention above. I hold several utility stocks- D (Dominion energy), SO (Southern), DUK (Duke Energy), and AEP (American electric power). All are located in areas that have been (relatively) supportive of reasonable raises in electric rates, something I always consider in a utility. They also have decent dividend growth rates, (although you will not get rich quick with any of them).
I suspect future growth will require more (much more?) electricity generation capability, and as you mentioned there will be “pressure” for “green energy” as well as less use of “polluting” energy (coal, NG, oil, etc.). Nuclear would be ideal, but (so far) it has been a boondoggle as far as getting systems online, at least in the recent past. I suspect we will see a lot more wind/ solar and other renewable sources, with natural gas “backups” for nighttime, low wind periods. One positive development is that wind and solar seem to be becoming more efficient and productive with increasing technology, hopefully that continues.
Hopefully regulators will be at least “reasonable” in allowing the companies to pass on increased costs to consumers. I am NOT adding to any of them now, unless they come down significantly, for the reasons you mentioned.
Win
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Post by bizman on Mar 24, 2022 19:43:51 GMT
Good idea for a thread. So many facets to this proposition.
I'll start with the fact that 2+ years ago, I was about 30% utilities, and am now about 10%. The concern about inflation and interest rates is a good one.
As far as the funding of growth and attractiveness of incentives needed to make it happen, I think you have to look at what society, or at least the elites, want. They want a massive shift from oil and gas to EV's. They want to finance it through the balance sheets of utilities, rather than having it all paid for directly by the govt. This means that incentives need to be strong or the companies won't make the investments.
Unless the govt decides to nationalize all utilities and put the debt on the federal balance sheet (which I think is nearly impossible to imagine), at least during the period of massive investment, they will need to provide attractive ROE's, tax credits and other measures to make the needed build out happen.
Now, the cost to the ratepayers will be a big concern, but as in Europe, the concerns of the average person who ultimately pays the bills comes last to the hysteria over climate change (existential threat? Ya right.). There is a lot of room to increase rates before we get to where Germany is. The big question is does the public rebel against the climate change at any cost ethos of the elites and overthrow them because of the costs? If this happens before the massive needed buildout happens, then the CC aficionados don't get the world they want.
After the buildout happens, you can count on the politicians that created the mess to turn against the utility companies and demagogically blame them for the costs and profiteering and such, just like they have made the oil companies into the enemies of the people.
But it seems to me there is 10-15 years of heavy investment needed to get where they want to go in terms of buildout of renewables and increased generation to shift the transportation part of the economy over to electric. And that's even if they can do it in a way that retains sufficient baseload power so we don't have rolling blackouts killing people in the winter (we need nuclear and nat gas for resiliency, whether the climate people like it or not). So ROE's should remain attractive or they don't get the "progress" they want.
As one example, American Electric Power yields 3.24% and given the menu of growth projects on the horizon, they recently increased their long term (I think 3-5 year target) of earnings growth from 5-7% annually, to 6-7% annually, with the dividend growing in line with earnings.
While multiples can contract with higher interest rates and inflation, the headline total return projection of say 9.5-10% without multiple contraction means the dividend should be safe and grow, and maybe you take 2-3% off the total returns for a few years because of inflation. Who knows? Doesn't sound disastrous unless inflation is out of control and stays that way for 5 or 10 years. Could it happen? Sure. Which is why I'm down from 30% to a 10% allocation.
Much more to be said on this topic. Look forward to the input of others.
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Post by Deleted on Mar 24, 2022 19:55:12 GMT
Biz! Oustanding post! Makes me want to just start buying! Just kidding - but great post - it's all about that guaranteed ROE!
They do look pricey right now. I am at 5% in my portfolio.
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Post by steadyeddy on Mar 24, 2022 20:31:52 GMT
Excellent posts so far.. I am learning a lot. I just hold a small position in UTG.
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Post by anitya on Mar 24, 2022 21:36:58 GMT
bizman , With a growth bias portfolio, I do not own utilities, except what PRWCX, FIF, & Berkshire own. Presumably, I could have owned utilities instead of current cash for my fixed income sleeve, but I did not want invest so much in this regulated sector and so never bothered to spend the time to learn about this sector. Since you had invested 30% of your portfolio in utilities, I consider you to have understood this space as well as any, and as such making deliberate choices. Do you mind sharing why you had invested at 30% and why are you still continuing at 10% and not take it down to 0-5%? Finally, what would make you take it down to 0-5%? Thanks.
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Post by retiredat48 on Mar 24, 2022 21:46:11 GMT
bizman,...I just noticed... YOUR FIRST POST!! Welcome...and nice post. R48
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Post by Deleted on Mar 24, 2022 22:01:32 GMT
Interest rates - Interestingly in a rising rate environment with inflation, my utilities - AEP and DUK are doing quite well. I heard on the news today some analyst say that utilities do well during rising rates - no so great once they arrive, I don't know why. I do understand though these are basically monopolies that want capex. Not easy entry to this industry - TSLA has done well here from what I have read - a power company in the making. Dividends have a history of being steady and increasing. Compounding does the rest. My investment since 2014 is up 2.3X in AEP. And I never even think about it.
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Post by bizman on Mar 24, 2022 23:10:34 GMT
bizman , With a growth bias portfolio, I do not own utilities, except what PRWCX, FIF, & Berkshire own. Presumably, I could have owned utilities instead of current cash for my fixed income sleeve, but I did not want invest so much in this regulated sector and so never bothered to spend the time to learn about this sector. Since you had invested 30% of your portfolio in utilities, I consider you to have understood this space as well as any, and as such making deliberate choices. Do you mind sharing why you had invested at 30% and why are you still continuing at 10% and not take it down to 0-5%? Finally, what would make you take it down to 0-5%? Thanks. Hi anitya and everyone, I learned a lot from Josh Peters when he was at M* DividendInvestor. I prefer dividend + growth stocks. Not the high yielders that are about to be cut or that won't grow and not the ones that yield 0.5% that grow 25% a year. There are a few stocks in the sweet spot, but not many. When these are attractive, this is where I feel most comfortable. One of Josh's ideas that I have gravitated towards is the basic concept of the dividend discount model, where if you are buying at a fair price and the business model isn't too feast or famine, long term total returns should roughly approximate the dividend yield plus the dividend growth rate. So I like the idea of a 4% yield growing 6% or a 3% yield growing 7% or something like that. If you can find that at a fair price, that's what I try to do. Of course, complicating this a lot are valuations and trying to sniff out and avoid dividend cuts well before they happen. This is easier said than done, and not for everyone. Additionally, for the last ten + years I have not been a fan of fixed income. So I kind of have a hybrid of dividend stocks and cash to try to fill the twin roles of income and stability, at least the best I can. I invest in growth too and have owned a good chunk of MSFT since July 2016, so I'm happy with that one. But for me, if I can find a 3-4% safe and growing yield and see my way to an 8-12%+ total return over the long term, I'm happy. That's why I was more heavily in Utes before, and am less now. Don't know that I can tell you with precision why 10% and not 5% or 0%. It just seemed imprudent to have it so high with the inflation and rate picture seemingly having much more upside risk than otherwise. I've also got plenty of cyclical exposure and the Utes still provide a nice cushion on risk off days, at least mostly. My biggest change in my portfolio over the last couple of years is adding to the Schwab Dividend ETF (SCHD) which makes up a bit more than half of my stock portfolio at present. Good dividend, good growth rate, attractive trailing returns, lower than market valuation, and eliminates the need to worry about individual holdings. That and I'm pretty heavy in cash now as I've raised it to about 1/3 of assets. Not so much a bet against the market as being "kicked out of" a few holdings and not knowing what to do with the proceeds. Example, I sold a large position in Philip Morris at $101.86 after the Russian invasion of Ukraine because the business rupture doesn't look likely to be healed soon, and Russia represents 9% or so of revenues and a lot of the growth from their iQos heat not burn device. I've missed downside to its close of $92.58 today, but time will tell whether that is a good move or not. I'm always in search of good ideas. Look forward to being turned on to some by the other board members. Cheers!
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Post by Deleted on Mar 25, 2022 1:31:03 GMT
As I recall Josh would look at M* for fair value guidelines. AEP has a forward yield of 3.25% and a 5 year DGR of 5.8% if the site I pulled from is correct. Is the dividend safe - capacity to pay, sufficiency, earnings stability. Utility dividends are pretty stable. Will it grow - 5.8% is okay - not if inflation stays high though. Then you have to use various ROEs and growth rates. Basically for a 3% dividend yield, Josh would like to see implied dividend growth of 7% - based on a market return of 8%. Basically - no surprise - utilities seem to be overpriced right now per Josh's model. At least AEP is. I think most are. Morning* agrees giving it a FV of $91 and 2 star rating. Notably - I think Josh also thought a dividend should grow at the rate of inflation. I think smoothing it out we optimistically hope 3% is a good 5 year estimate?
Utilities are high right now. I'm waiting. I thought as rates went up, they would fall.....
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Post by bizman on Mar 25, 2022 1:45:03 GMT
Agreed, Sara. It doesn't look attractive to me now and I'm not looking to add. Not sure about your 3% (do you mean total return?). I love Josh but have kind of modified his method for my own purposes. I got 6.5% forward dividend growth from the midpoint of the company's projection for earnings and dividend growth. I just figure the 3.25% dividend should be able to grow 6.5% a year going forward as a vague estimate, no precision assumed.
I have learned that the more precise my estimates, the more God laughs at me. I just try to be roughly right and directionally correct. Sometimes it works and sometimes not. The market has given me heaping helpings of humility so I have learned that I don't know the future.
Will be fascinating to see what happens with interest rates and inflation, and especially with the Fed balance sheet.
Seems to me we are in a situation possibly like late 60's early 70's when the Fed could have stepped on inflation but didn't have the will (plus LBJ and Nixon harassed their respective Fed chiefs to keep money easy), so it went on longer and then the oil embargo and wage/price spiral kicked in.
If the Fed is half-hearted, unless we get really lucky with inflation coming down on its own, we could be looking at longer and stronger inflation down the road and perhaps an eventual need for a Volcker. I sure hope not, but we do live in interesting times.
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Post by Deleted on Mar 25, 2022 1:59:27 GMT
True - but I do think that if you stick to Josh's model you can be relatively successful. Might need to take the expected market return down to 6%. So you really really need to be choosy. I have strayed - gotten sloppy really - and your post was a good reminder. By the way - I still have my PM. Have thought about selling it multiple times. I think your call was good except - what substitute? Cash - i don't know. There are some candidates out there, but for another thread. Any utilities you like? I am looking at this CEF UTG - it's interesting. I don't quite understand the leverage it is using to generate a 7% yield, so still have some research. But I do like utilities. And R48 peaked my interest and you expanded on potential capex. That's intriguing. Utilities being the new oil exploration and production companies of the world. Will I live that long (59 with 60 around the corner)?
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Post by bizman on Mar 25, 2022 2:12:47 GMT
True - but I do think that if you stick to Josh's model you can be relatively successful. Might need to take the expected market return down to 6%. So you really really need to be choosy. I have strayed - gotten sloppy really - and your post was a good reminder. By the way - I still have my PM. Have thought about selling it multiple times. I think your call was good except - what substitute? Cash - i don't know. There are some candidates out there, but for another thread. Any utilities you like? I am looking at this CEF UTG - it's interesting. I don't quite understand the leverage it is using to generate a 7% yield, so still have some research. But I do like utilities. And R48 peaked my interest and you expanded on potential capex. That's intriguing. Utilities being the new oil exploration and production companies of the world. Will I live that long (59 with 60 around the corner)? Hi, Sara. I'm thinking your situation may not be the same as mine vis-a-vis PM. A quirk of mine is that I only think I can really know and keep track of a smallish number of individual companies. So when I invest in an individual stock, I tend to have big positions -- say 5% to as much as 10%. Which is why I have kind of a hair trigger if I see a potential big risk to earnings or the business model like the thing with Russia. I'm guessing such figures don't apply to you and your portfolio. Given my idiosyncratic nature in this regard, using SCHD as a bogey with no specific stock risk works well for me. But I just don't know how big I want that position to get. Plus, on down days, it can be down hard. So I need a bit of ballast. I'm out of no brainer good ideas at the moment. I am also intrigued by UTG and the Pimco CEFs. I'm just not sure what a potentially much higher interest rate picture might do to them with their leverage. At a lower price, there are a lot of things I'd be interested in. But at the moment, I really struggle to find something that looks good. I am feeling rather lily-livered. Which probably means I should be loading up on risk. But not yet for me.
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Post by Deleted on Mar 25, 2022 2:25:04 GMT
Agree as to interest rates and unclear picture with regard to UTG. PM- 1.2% of portfolio. I saw the 9% potential revenue hit as well. Heaven knows how it will end up. I might well follow into SCHD - have looked at it a little. Would like to have less companies myself. So, let's see what the next Fed minutes bring and a balance sheet redux.
Hopefully someone - Steelpony that would be you..... - will chime in and tell us about potential impact of interest rates on UTG leverage.
Steelpony - not meaning to put you on the spot, but this is your wheelhouse. I would appreciate any insight here or via message. I will do some research into how this yield is accomplished myself. Thank you!
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Post by anitya on Mar 25, 2022 2:30:50 GMT
Thanks bizman. I too am carrying 35% in cash. If one is going to invest in highly indebted companies, Utilities are the ones to be in. I generally stayed away from regulated businesses like utilities and banks. Do utilities pay out most of their Net Income? I am presuming cash flows are way higher because of depreciation and amortization and the delta serves to replenish capital assets. Is it common for utilities to raise capital through secondary offerings for expansion? What are the best ETFs (any active?) for investing in utilities?
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Post by bizman on Mar 25, 2022 3:41:54 GMT
Thanks bizman . I too am carrying 35% in cash. If one is going to invest in highly indebted companies, Utilities are the ones to be in. I generally stayed away from regulated businesses like utilities and banks. Do utilities pay out most of their Net Income? I am presuming cash flows are way higher because of depreciation and amortization and the delta serves to replenish capital assets. Is it common for utilities to raise capital through secondary offerings for expansion? What are the best ETFs (any active?) for investing in utilities? I understand where you are coming from in shying away from regulated businesses. But the interesting thing is, that in my estimation unregulated utilities are the worst place to be. There is no real "moat" there. Now utilities aren't going to get terrific returns, but under the right circumstances and with favorable regulation, they can be decent bogies especially when they are overlooked. Now they aren't particularly cheap and there is the potential for much higher interest rates, which would be negative. They do tend to have high payout ratios. AEP POR is 60.48 acc to M* and estimated to be 65% by Value Line for 2022. Many utilities are slower growing and somewhat higher payout ratios than AEP, which is why I kept it. Utilities do raise capital for new projects. Very roughly you can say half from debt and half from equity. Sometimes you will hear a Ute say that their regulator allowed them a say 10% ROE with a 54% equity layer. That sort of thing. One reason I like AEP is that they seem to be fairly good capital allocators. For instance, they recently sold their Kentucky Power subsidiary (which was in an unfavorable regulatory regime with below average ROE's) for a nice price and they intend to "recycle" that capital into their growth projects so that they won't need to issue additional equity for quite a while. Other's have mentioned UTG. This is a closed end fund that uses leverage, and also invests in some oil and gas and telecom type stocks if I'm not mistaken. I'm interested there, but there is some unknown risk with the leverage that I'm not totally comfortable that I understand. I would stay fairly small there if I went in. Regular utility ETFs are XLU and VPU. Next Era Energy tends to be quite a big position in both of those. It has been a lower yielding and faster growing ute. I don't know of any active ETFs for utilities other than the above-mentioned CEF UTG, which really isn't an ETF. Personally I would wait for a selloff before making much of a commitment, but that's just me. Good luck!
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Post by uncleharley on Mar 25, 2022 12:37:32 GMT
"Are Utilities a good buy now?" My short answer is yes, but it seems that I march to a different drummer than most people on this board. My buy/sell drummer is a daily chart that depicts the current trading patterns for whatever it is that I am considering. [https://stockcharts.com/h-sc/ui?s=$UTIL&p=D&b=3&g=0&id=p97062766496&a=417146891&listNum=86] is the daily chart for the Dow Jones Utility index. It shows the index has just completed a consolidation pattern called a pennant and has broken above the upper trendline of that pattern indicating that the new trend for the price of utilities is up. The 50/200 day moving average has made a golden crossover putting the moving averages in a bullish allignment. Additional bullish confirmation can be seen in the MACD indicator which illustrates bullish momentum in the trading price of the index. So the correct answer based on current, factual information, to the question can only be Yes, this is a good time to buy Utilities. Many investors, including myself, like to take a longer term view of the potential of a security before investing in it. For the longer term, my drummer is a long term chart. stockcharts.com/h-sc/ui?s=$UTIL&p=M&b=3&g=0&id=p00506899319&a=1130616683&listNum=86 is a monthly incremented chart which goes back 25 yrs or so. It shows the value of the Utility Index has been rising in a tight rising channel since the correction in 2008 and the implementation of Quantitative Easing in the early part of 2009. It does show a relatively miner correction in 2020 when an attempt to end QE failed. That correction in 2020 serves to prove the theory that we are in an era which could be called QE Forever. My conclusion is that the tight rising channel that the Utility index has been rising in will continue until the powers that control QE find a way to end QE. That, IMHO, will be a very long time. EDIT: stockcharts.com/h-sc/ui?s=$UTIL&p=D&b=3&g=0&id=p97062766496&a=417146891&listNum=86 A better link for the daily chart.
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Post by Chahta on Mar 25, 2022 17:37:19 GMT
retiredat48; "PROGRESSIVE THEMES ARE NOT GOOD FOR UTILITY OUTLOOK. Inflation means utilities, to keep up, will have to raise prices to enable increasing dividend payouts. Such pricing will be met with strong backlash from customers and Liz Warren types. Like, regulators will say: "you can't ever increase dividends again as utilities, as you have made your money on initial investments...so stop asking for rate increases." Sorta like "rent control arguments" in blue states. Second, the need for capX spending will further mean no divy increases, as progressives demand new green power sources. “ Interesting thought. If “they” want to electrify the country will they not try and price control the “fuel” or tax the trap out of it like gas?
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Post by anitya on Mar 25, 2022 23:49:47 GMT
Thanks bizman for your replies. If Utilities do go to the capital markets to raise equity for new projects, my naïve thinking is regulators may not have too much power in setting / throttling ROE or at least there is a floor if the regulators want new investments into more efficient power generation. Next era energy being a big part of VPU and XLE is interesting to me but i suspect unregulated utilities are also part of these ETFs and you have a poor view of those. So, my search for active funds will continue. Thanks.
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Post by retiredat48 on Mar 26, 2022 6:45:29 GMT
retiredat48 ; "PROGRESSIVE THEMES ARE NOT GOOD FOR UTILITY OUTLOOK. Inflation means utilities, to keep up, will have to raise prices to enable increasing dividend payouts. Such pricing will be met with strong backlash from customers and Liz Warren types. Like, regulators will say: "you can't ever increase dividends again as utilities, as you have made your money on initial investments...so stop asking for rate increases." Sorta like "rent control arguments" in blue states. Second, the need for capX spending will further mean no divy increases, as progressives demand new green power sources. “ Chahta replied: Interesting thought. If “they” want to electrify the country will they not try and price control the “fuel” or tax the trap out of it like gas? Yes...the "they" will also try price controls on gas/fuel etc, and raise taxes on oil/gas, and like Bernie Sanders is just now proposing--a 95% excess profits tax on corporate gains since a year 2019 baseline. Remember, banks were NOT permitted to raise dividends during the financial crisis...and long after. And buybacks suspended. Easy to see the gvt saying that since it is an 'emergency" for the USA to grow utility outputs and increase electricity supply, requiring large Cap X spending, then dividend increases are hereby suspended--disallowed. To me, the central question is whether dividends can grow with inflation...or not? Utes will find this difficult as cited above. Whereas, consider a company like VISA. If inflation is 8%, that means charge card total charges will likely grow 8%. Visa takes 0.25% cut of each transaction, so their earnings can rise proportionally with inflation. And VISA dividends can rise the same. Further, if long term treasury bonds get to 4% yields, this will compete with utes for investor money. A "safe", no effort 4% from Treasuries (or higher for Corporates) will be a formidable alternative as well. R48
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Post by Deleted on Mar 26, 2022 11:09:58 GMT
We are all going to see what higher inflation does to our returns - including from treasuries. Dividends from quality utilities are stable. As mentioned, AEP's dividend has grown at 5.8% the last 5 years, and 10 I think. This has kept up with inflation well. Will it continue to do so? I think yes if inflation is brought under control. Looks like that will happen. Have to imagine mortgage rates will start slowing down housing/economy.
There is no doubt that as the cost of capital goes up, if the ROE stays steady, there will be pressure on utility valuations and pressure on dividends. But regulators can increase the allowed ROE to incentivize capital expenditure. Otherwise the utilities won't build needed infrastructure. The variables of inflation, growth, regulatory actions will be important to the future valuations of utilities.
Edit - 8% inflation and Visa as a comparison for utility stocks. If inflation stays at 8% for the long term - and I highly doubt that - that would not bode well for Visa either. Discretionary spending will slowly choke. Wages won't keep up at that pace. Even without higher inflation - let's say 3% - I don't know how stable Visa earnings are, but I do know it has a tiny dividend yield. It's a growth stock. It has its role in a portfolio, but not for dependable income.
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Post by uncleharley on Mar 26, 2022 12:14:53 GMT
What IF!!! What if some electrical equipment manufactorer put together a package of a relatively inexpensive solar panel which could power a high voltage battery charger that an EV or Hybrid could plug into. This might enable every homeowner to provide their own electricity without bothering any Utility company. I believe this technology is available now. It would just take some start-up to implement it.
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Post by Deleted on Mar 26, 2022 12:37:25 GMT
We will then all be buying stock in that electrical equipment manufacturer as well as that of the high voltage battery charger....and if someone cracks the code on battery efficiency and size...IF that occurs, we will not miss our dividends in utilities. This reminds me of the argument fossil fuels are going away. One day.
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Post by uncleharley on Mar 26, 2022 14:04:20 GMT
We will then all be buying stock in that electrical equipment manufacturer as well as that of the high voltage battery charger....and if someone cracks the code on battery efficiency and size...IF that occurs, we will not miss our dividends in utilities. This reminds me of the argument fossil fuels are going away. One day. FWIW, I agree!
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Post by bizman on Mar 26, 2022 16:01:22 GMT
We will then all be buying stock in that electrical equipment manufacturer as well as that of the high voltage battery charger....and if someone cracks the code on battery efficiency and size...IF that occurs, we will not miss our dividends in utilities. This reminds me of the argument fossil fuels are going away. One day. Of course, technological breakthroughs are what improves all of our lives. If we can move a lot closer to something like free and limitless energy, it will act as a massive tax cut for everyone that will enable much more of everything good, as increased access to energy at an at least somewhat reasonable cost is the main thing that has improved human lives over the last 200+ years. In such a case, we will all be better off. Let's hope! At the same time I am reminded of the quote from Stephen Jay Gould, "Nothing is so convincing as an anticipated discovery." Where are our flying cars? What about the solid state battery breakthrough that is right around the corner I've been hearing about for the last 5-10 years? Beware of the hype cycle guaranteeing something that may not be real. Like how the Green New Deal is supposed to be able to replace fossil fuels without any real cost to society because it will create all these amazing jobs and wealth. If such technology exists, now or in the future, no one will need to mandate it as it will just naturally replace the old, more inefficient technology. Bring on the real world progress. But not political "progress" that is a way to lie to the average person that they can have some needed good for free, except really the price tag will be gigantic and hidden. And I am kind of amazed at the "haters" of utilities, as the miracle of almost always on, reliable power is only really 100 years or so old in the developed world. Funny how soon we adapt to things and take them for granted. Much of the world, esp. Africans, would kill to have the abundant access to energy we Americans take for granted. And I wonder, even when everyone has access to some level of personal generation, are people really going to want to disconnect from the grid widely? (Or maybe they want it as something there just in case as long as they don't have to pay for it -- how does that work?). Doesn't sound massively efficient, kind of like everyone having their own computer server and tech team rather than farming it out to Microsoft Azure or AWS. Are we really going to have our own electric plants but farm out our computing to a server farm hundreds of miles away? I'm sure some survivalists and remote people or those particularly committed to a kind of personal autarky will. But then who operates and pays for the electricity that runs traffic lights and street lights and all of the rest? Not to mention 5G and whatever else we have to deal with for autonomous cars, and all of the needed battery chargers everywhere and so on. The economist Hernando de Soto argues in his book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else that the fact that we have well developed property rights and entities that own infrastructure to take care of it and maintain it is one of the big reasons for the developed world's success. Somehow, someone has to be thinking about and taking care of the network of energy, fibers and wires, computer servers, internet and all else that connect us and keep society moving. And I would add at least the Transmission and Distribution part of the grid. And someone is going to have to pay for it. Just like taxes to pay for the government, that person is going to be all of us or it would seem to likely lead to societal breakdown. Just like who wants to pay for collective defense, but the most expensive thing is being caught unprepared in a war. ******************************** Forgive the discursion, but it was about Utilities. Back to the more financial end of things, I've been thinking about the inflation/interest rate environment in relation to income investments like utility stocks, closed end bond funds, and the like. And I heard Mike Santoli mention the analog of 1994 and the rapid interest rate increases that caused financial havoc including the Orange County bankruptcy, and, as Mike put it, the implosion of closed end bond funds. Made me think of UTG and the PIMCO CEFs. Were any of these in existence then? What was the track record for them if so, or for those that did exist at the time? Maybe someone like Steelpony was involved at the time and remembers? Anyway, even if there was to be a big dislocation, it doesn't have to be all bad news as it may be a creator of opportunity? Just a thought.
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Post by uncleharley on Mar 26, 2022 18:36:12 GMT
The best info I have is that UTG came about in 2004. I don't recall hearing about PIMCO or Bill Gross in the '90's but it was all tech then, not bonds.
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Post by anitya on Mar 26, 2022 21:38:17 GMT
bizman, Good posts. If it is not too much trouble, may be post here when you decide to increase your allocation to Utilities. Thanks.
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Post by alvinthechipmunk on Mar 27, 2022 6:02:44 GMT
Excellent posts so far.. I am learning a lot. I just hold a small position in UTG. UTG looks attractive to me. Over 6% distrib. rate. But most of it is NOT income. They've been selling assets to keep the div. up. Am I mis-reading that?
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Post by alvinthechipmunk on Mar 27, 2022 6:16:55 GMT
Utilities, yes: To the extent that I can control my own spending, I'll need less in the way of dividends from utilities or from ANY income-oriented investment. If I can live happily without wasteful spending, I can do well with a much smaller portfolio. When I rein-in expenses, I'm effectively reducing the inflation rate for myself. Half of the "problem" is solved! UTG is puking up .19 cent divs per share, every month. That looks like a windfall, compared to my recent bond-fund monthlies. I'm becoming more interested in single stocks, lately.
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Post by Deleted on Mar 27, 2022 14:18:13 GMT
Many of these utilities seem to have reasonable payout ratios, but when you look at their cash flow statements, free cash flow (I just do operating cash flow less capital expenditures) is frequently negative, and the cash for dividend payments is typically generated through debt/equity issuances. Such dividends might be costly to maintain going forward.
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