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Utilities: a current review

As has been said in past comments on this Industry, it is pretty much a staple in most income portfolios. Regulated utilities provide the commodity.....water, electric, gas.....that all households and business need to function. Logically, it would seem, regulated utilities should be a staple of every one who takes the dividend seriously, or so it would seem.

The US Energy Information Administration, or EIA, has just updated its demand (sales) of energy to residential, Commercial, Industrial and other, customers. Here is

Electric usage 2020 may.jpg

So for those looking to utilities, it may be safer right now to focus on those who focus on providing electricity primarily to residential users and perhaps avoid those whose power generation goes primarily to Industrial companies.

With a bit of 10Q digging, of the regulated electric utilities with current yields of at least 3.7% (12), the following is what each reported to be its % of residential sales

El utilities by residential percent.jpg

With the following current yields as of COB Jul 24.

el utilities CY 7-24.jpg

As one might expect, there seems to be a negative correlation between residential % and CY

The next step is to look at dividend history and CF fundamentals, which I haven't gotten to yet.

FYI

BruceM

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Re: Utilities: a current review

Thanks for posting.  I've been digging into utilities a bit for income.

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Re: Utilities: a current review

Thanks, Bruce. The only utility I own is DUK. Any idea on one or two others that you think offer value and NAV safety?

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Re: Utilities: a current review

Thanks Bruce! Looks like SO and DUK are “relatively safe” here. What do you think of AEP and D?

Win
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Re: Utilities: a current review

Thanks, good info.

Of course question is when and how demand will improve.  

For now, I'm hanging on to my large Utilities holdings.

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Re: Utilities: a current review

Good thread.   With low interest rates and high unemployment, do we assume that these utilities will not be allowed to increase dividends?  If so, I wonder if the corresponding preferreds are a better investment at this time.

I have zero sector specific investment in utilities and zero in preferreds.

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Re: Utilities: a current review

@outandabout 

D is an interesting story. Their cash flows, except one, looked fairly decent, not particularly strong, but decent. So why the dividend cut? Well, this picture gives you an idea...

D interest expense.jpg

You can see that D's interest expense as a % of CFFO + Interest expense, climbed progressively from late 2018 thru mid 2019, getting above 27%...and that is not where management wants to be. Why did this happen. Here's why...

D cffi per share.jpg

Starting mid 2016 thru mid 2017, D made lots of investing buys, including $5.3B in 3Q16. And what do they have to show for it? Nada! Zilch! Look at the CFFO/sh red line...flat to declining beginning 1Q16. Their return on those monster investments, whatever they were, did not go well. They finally had to sell off a bit over $1B in 4Q18 to gen up the $$ to pay down some of the debt, dropping it from $37.3B in late 2018 to $35.5B today, getting their interest expense down from 27.4% to 23.3%, which is still a bit high for a ute, so I'd guess they plan on using some of that cut dividend $$ to put towards debt to get the interest expense lower.....but that's only a guess.

BruceM

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Re: Utilities: a current review

@Win1177I hold AEP (and have for a long time) but didn't include it here as their CY is down around 3%.

SO has one of the best dividend histories and its cash flows look decent. Although 57% of past revenues have been from commercial and Industrail, they've got a good management track record....and I'm betting on that.

WEC is another strong ute but with a low CY of about 2.7% as I recall.

DUK is another of my long term holdings. Its dividend is well covered, but like D...ok, not quite as bad as D....but CFFO is not growing significantly in the face of lots of investing expenses. It also has a higher proportion of residential sales at almost 70%.

BruceM

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Re: Utilities: a current review

Thank you, Bruce.  Your review is very helpful.  I own DUK, SO and PPL.  I like PPL's International exposure and the high dividend.  Looking at your graphs, I may take a closer look at EXC and FE.  I owned both years ago, but it has been a long time.

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Re: Utilities: a current review

 

Bruce.

I have been surprised at the relative poor showing of utilities in this market run.

I'll leave with you the following, that I am not "pushing", but has caused me to add another negative re utilities:

I have heard two guru's (among many I casually follow) state that a game-changer (negatively) for utilities is the upcoming announcement of Tesla re significant improvements in batteries and power storage.  The announcement is a few months away.

Now, one may ask what does this have to do with utilities.  The postulation is that, if we get much better power storage in batteries, consumers may become their own utility generators.  Such as from solar.  You buy batteries; you  add solar power...you generate...you store...you use as needed; residual is sold back to power companies (which they are now required to buy).

Longer term, this could adversely affect utilities as a business.

R48

 

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Re: Utilities: a current review

Thanks Bruce! Been wanting to add to DUK, SO, & AEP, but at lower prices. None have fallen to my “buy” prices. Didn’t catch the sentence about yields being higher than AEP. Will still add t D if it comes down some more, but not at its current price. Again, thanks!

Win
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Re: Utilities: a current review

Thanks for the post, Bruce.  Lots of food for thought.  

A few thoughts, in no particular order:

If considering FE, keep an eye on the recent arrest of the Ohio State Speaker of the House by the FBI on bribery charges related to a nuclear bailout law written to benefit FE and their spinoff of FES (the nuclear part of the business).  So far no direct indictment of CEO Chuck Jones or anyone else at FE (at least that I am aware of), but it seems awfully hard to believe a lobbyist and/or politician just went off on their own and committed bribery.  It was a key to FE's plan to ditch the nuclear outfit and let them fall into bankruptcy.  I suppose you could do some cute figuring that Ohio is only part of their service territory and revenue, but to say the least I would think FE would be in the penalty box with all of their regulators and politicians for the next several years.  

In MDI, George Metrou panned D's deal to sell their gas business to Buffett.  He said, "The company sold roughly 25% of its earnings stream for aftertax cash proceeds amounting to 4% of its market capitalization."  He doesn't appear to have sold D yet though.  Glad I didn't stick around, although I own a slice through VPU.

I own DUK, AEP, LNT & VPU.  AEP and LNT are faster growing, with AEP big in transmission and the recent approval for the North Central Wind Project.  LNT is involved in wind and solar in Iowa and Wisconsin.  If the Dems win and infrastructure is their big push, I would believe wind, solar, and transmission investments would be at least encouraged, if not advantaged.

DUK will likely be slow growing given the written off investment for their 47% of the cancelled Atlantic Coast Pipeline, but at least they didn't do a dubious deal to offload more of their existing cash flows for a relative song like D.  M* analyst Andrew Bischof says 76% payout ratio will mean 3% dividend growth going forward.

@retiredat48 I heard Chamath Palihapitiya (Social Capital, Facebook, Virgin Galactic) talking up how having conquered the auto industry that now Tesla is going to displace the utility industry.  Maybe Elon Musk really will end up as King of Mars as Kara Swisher has dubbed him, as well.  

But it seems to me to make such a distributed system even close to economical, Elon is going to have to invent much better battery technology, not just push out the current not-ready-for-prime-time battery technology.  

Plus, if the utilities collapse, who will ensure interoperability of the overall grid and balance loads and stuff (and make sure the traffic lights work) and pay all of the distributed "generators" for their production?  Seems a bit fanciful to write off the utilities even before the fossil fuel industry has collapsed, especially with battery technology not yet having a breakthrough to make it function at scale as baseload power.  And if they come up with such a breakthrough, why wouldn't it make more sense for utilities to deploy such at scale?

And I still say that that even if there is enough lithium in the world for all of this battery building, if you add the carbon footprint of all of the mining and manufacturing of just the lithium and cobalt, the benefit to CO2 is likely much reduced if not eliminated.  But then I forgot that it's a Crusade, and not an exercise in cost-benefit analysis.

Finally, my general idea on the Covid Economic Crisis is if you think we get back to normal within 6 months to a year, it may be just a hiccup unless a particular utility is really close to the edge.  Of course, if you posit longer than a year of major societal disruption because of Covid-19, I would think all sorts of businesses would be dropping like flies in terms of dividend cuts and bankruptcies.  It might be easier to count the ones that won't have trouble, and that list might not take up all 20 fingers and toes.  And I would think it would go way beyond utilities.  Hopefully it won't come to that.

 

 

 

 

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Re: Utilities: a current review

Bizman, Thanks for your comments on FE.  I just finished doing a bit of reading, and came across the issue you mention. 

The one other utility I own is BEP, all renewables.  

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Re: Utilities: a current review

 

Hi bizman.

I don't disagree with your comments.  Surely it would take some time.  Although I don't consider this would put utilities out of business per se...just a negative impact.

So bizman, I would appreciate your take on the following two concerns re Utilities:

1.  The dividends are unsafe, politically

That is, utilities are regulated.  With the strong moves to socialism of varying degrees that may be coming, coupled with fed zero interest rate policies, one can make a case that utilities dividend yields now are way too high.  If the fed 10 year is at 0.55%, then utilities shareholders yield should be comparable...plus perhaps a little.  In the extreme, utilities should pay no dividends...use that money to convert to clean energy.

2.  Utilities are in the "easy" category to nationalize.  

Similar argument...same trend to socialism.  Like, the "peoples" rationale is: why should we pay for pipelines crossing "our land" to make money for others--nationalize and take them.  Ditto power generation.  Nationalize them...and shareholders, don't expect a very fair or good price in the taking...if any price.  Look at what happened to PG&E in california.  Partly nationalized, no?  California will end up owning this utility, by various means.

Thanks in advance...

R48

 

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Re: Utilities: a current review


@retiredat48 wrote:

 

Hi bizman.

I don't disagree with your comments.  Surely it would take some time.  Although I don't consider this would put utilities out of business per se...just a negative impact.

So bizman, I would appreciate your take on the following two concerns re Utilities:

1.  The dividends are unsafe, politically

That is, utilities are regulated.  With the strong moves to socialism of varying degrees that may be coming, coupled with fed zero interest rate policies, one can make a case that utilities dividend yields now are way too high.  If the fed 10 year is at 0.55%, then utilities shareholders yield should be comparable...plus perhaps a little.  In the extreme, utilities should pay no dividends...use that money to convert to clean energy.

2.  Utilities are in the "easy" category to nationalize.  

Similar argument...same trend to socialism.  Like, the "peoples" rationale is: why should we pay for pipelines crossing "our land" to make money for others--nationalize and take them.  Ditto power generation.  Nationalize them...and shareholders, don't expect a very fair or good price in the taking...if any price.  Look at what happened to PG&E in california.  Partly nationalized, no?  California will end up owning this utility, by various means.

Thanks in advance...

R48

 


Two really terrific questions to which I don't have very satisfying answers.  In a sense, they are the same question.  The government can confiscate wealth by a number of means, including outright nationalization if people will accept the government owning the means of production.  Though Britain and other countries have gone through these cycles and reversed themselves, having paid a huge price for it.  

Two questions are whether this would be a costless enterprise for the country in the intermediate to long run (I think not) and whether average folks would stand for it. 

Admittedly, regulated utilities are ripe fodder for socialists to want to nationalize.  It looks like there is no cost and all gain.  But why do we have the system we have in the first place?  To provide services to the public while having it financed by the private sector.  Will governments really want to put the future ongoing investments needed for upkeep and compliance with environmental regs on their books?  And to have government employees be the ones to take the blame for problems like the wildfires in California?  And without the profit motive, will the companies really be run as efficiently by the moral equivalent of the DMV?

Though this assumes anyone involved in an attempted taking such as this would be at all practical minded and look past their next election to the long term good of the people.  Most of said people are likely innumerate, or at least have no interest in such practical concerns.

I would think Britain is further down the road on these questions than we are.  There have been some rather unpleasant rumblings coming out of their regulator OFGEM and politicians that make it look as though they will be looking to lower allowed ROEs, if not something much more severe.  Although Jeremy Corbyn did lose the last election.  Developments in the UK may give an early warning of changes to come here perhaps.  At the least, lower ROEs, more antagonistic regulators, and grandstanding politicians are always a risk.

California seems a special case, inasmuch as I don't see elevated wildfire risk in most of the continental US.  I don't have interest in owning any California or New York based utilities though, as the attitudes your questions suggest seem to be in rising evidence in both locales.

Of course, long term, nationalization is a disaster for the country and means that the economy will go into a huge dive.  Even Europe has mostly abandoned their adventures in this regard.

At the same time, the "smart" way for a leftist to effectively nationalize a business without as much of the downside is to increase their ownership thereof by fiat, otherwise known as raising taxes.  Which it appears is likely to happen with a new administration with control of both houses of congress this fall.  Much more than utilities will be hit by this.  It seems much easier to do than go through the trouble of actually nationalizing utilities and then having to take responsibility for their operation.

But again, I don't know the answers.  I keep trying to find a way to stay invested and eliminate all risk, but I just can't seem to do it.  Life is, as always, uncertain.

 

P. S.  I think politicians, in their desire to go after plutocratic capitalists, may have to realize there are a lot of ordinary retirees without defined-benefit retirement plans that rely on such companies' dividends to pay their bills.  And as has been said, these people do tend to vote.  

How strange that the Fed is trying to prop up the economy through the wealth effect and potentially socialists may want to destroy the economy to make everyone more equal.  Be careful what you wish for, socialists.  Few broke people have the capital to start businesses that employ others.

 

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Re: Utilities: a current review

Be careful what you wish for, socialists.  Few broke people have the capital to start businesses that employ others.”

Socialists don’t really care whether people have jobs, or healthcare, or even food. As long as everybody (except the elite in power) is equally jobless, equally sick and equally hungry. Then everything is fair.

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Re: Utilities: a current review


@Bizman wrote:

@retiredat48 wrote:

 

Hi bizman.

I don't disagree with your comments.  Surely it would take some time.  Although I don't consider this would put utilities out of business per se...just a negative impact.

So bizman, I would appreciate your take on the following two concerns re Utilities:

1.  The dividends are unsafe, politically

That is, utilities are regulated.  With the strong moves to socialism of varying degrees that may be coming, coupled with fed zero interest rate policies, one can make a case that utilities dividend yields now are way too high.  If the fed 10 year is at 0.55%, then utilities shareholders yield should be comparable...plus perhaps a little.  In the extreme, utilities should pay no dividends...use that money to convert to clean energy.

2.  Utilities are in the "easy" category to nationalize.  

Similar argument...same trend to socialism.  Like, the "peoples" rationale is: why should we pay for pipelines crossing "our land" to make money for others--nationalize and take them.  Ditto power generation.  Nationalize them...and shareholders, don't expect a very fair or good price in the taking...if any price.  Look at what happened to PG&E in california.  Partly nationalized, no?  California will end up owning this utility, by various means.

Thanks in advance...

R48

 


Two really terrific questions to which I don't have very satisfying answers.  In a sense, they are the same question.  The government can confiscate wealth by a number of means, including outright nationalization if people will accept the government owning the means of production.  Though Britain and other countries have gone through these cycles and reversed themselves, having paid a huge price for it.  

Two questions are whether this would be a costless enterprise for the country in the intermediate to long run (I think not) and whether average folks would stand for it. 

Admittedly, regulated utilities are ripe fodder for socialists to want to nationalize.  It looks like there is no cost and all gain.  But why do we have the system we have in the first place?  To provide services to the public while having it financed by the private sector.  Will governments really want to put the future ongoing investments needed for upkeep and compliance with environmental regs on their books?  And to have government employees be the ones to take the blame for problems like the wildfires in California?  And without the profit motive, will the companies really be run as efficiently by the moral equivalent of the DMV?

Though this assumes anyone involved in an attempted taking such as this would be at all practical minded and look past their next election to the long term good of the people.  Most of said people are likely innumerate, or at least have no interest in such practical concerns.

I would think Britain is further down the road on these questions than we are.  There have been some rather unpleasant rumblings coming out of their regulator OFGEM and politicians that make it look as though they will be looking to lower allowed ROEs, if not something much more severe.  Although Jeremy Corbyn did lose the last election.  Developments in the UK may give an early warning of changes to come here perhaps.  At the least, lower ROEs, more antagonistic regulators, and grandstanding politicians are always a risk.

California seems a special case, inasmuch as I don't see elevated wildfire risk in most of the continental US.  I don't have interest in owning any California or New York based utilities though, as the attitudes your questions suggest seem to be in rising evidence in both locales.

Of course, long term, nationalization is a disaster for the country and means that the economy will go into a huge dive.  Even Europe has mostly abandoned their adventures in this regard.

At the same time, the "smart" way for a leftist to effectively nationalize a business without as much of the downside is to increase their ownership thereof by fiat, otherwise known as raising taxes.  Which it appears is likely to happen with a new administration with control of both houses of congress this fall.  Much more than utilities will be hit by this.  It seems much easier to do than go through the trouble of actually nationalizing utilities and then having to take responsibility for their operation.

But again, I don't know the answers.  I keep trying to find a way to stay invested and eliminate all risk, but I just can't seem to do it.  Life is, as always, uncertain.

 

P. S.  I think politicians, in their desire to go after plutocratic capitalists, may have to realize there are a lot of ordinary retirees without defined-benefit retirement plans that rely on such companies' dividends to pay their bills.  And as has been said, these people do tend to vote.  

How strange that the Fed is trying to prop up the economy through the wealth effect and potentially socialists may want to destroy the economy to make everyone more equal.  Be careful what you wish for, socialists.  Few broke people have the capital to start businesses that employ others.

 


Thanks bizman...our thoughts very closely align here.  Couple comments:

--What is different is the "source of capital."  No longer need capitalism...just print the money, AND PAY ZERO PERCENT INTEREST.  I trust you are familiar with the (leftist) new MMT (Modern Monetary Theory) theories...borrow till the cows come home!  ZIRP advances MMT well.

--MMT to either buy the utilities (nationalize) or to say to utilities:  Get at it...borrow, borrow, borrow...clean up your air...climate change cannot wait!  Reduce (or never increase again) dividends.  And if I think dividends will never be raised in the future, then why not own preferred share stock funds, with a higher yield, whose dividend also will not be increased?  (BTW it is why I own preferred share funds).

--ESC is also unfavorable.  Utilities should be like they are on the game Boardwalk..."low income producers, working for the people."  Stakeholders are everyone!

--Yes, a corporate tax increase will hit utilities earnings, no question.

R48

 

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Re: Utilities: a current review

@retiredat48 

It really isn't battery capacity that is the key factor in roof panels....its the number of roof panels, their efficiency and the average daily number of hours of direct sunlight and the angle these rays strike the panel. Battery storage for solar roof panels will work well when its the sole source or when a utility does not offer a one-for-one exchange for excess production. As I understand it, most utilities already provide Net Metering, which means the utility acts as a sort of battery (holding excess production and returning it when the sun isn't shining).  Now, add a Tesla to this (or other EV), driving an average of about 62 miles per day will increase electric household demand by about 80% of a typical households 25 or so KWH/day. If there is no net metering, then a large capacity storage would make sense.

The other constraint on this is cost and useful life. The Powerwall II will hold about 13.5KWH and costs, all-in, about $10,500-$11,500 per their web site, with a guaranteed life of 10 years. The higher the usage the closer will be the useful life to the warranty, while lower usage will likely result in a longer life expectancy. Add to this the cost of roof panels and this gets very expensive.

Now, certainly, as time progresses, costs will decline. But it just doesn't seem a significant threat to current power production until utility prices get high due to demand/supply, where, for example, places like So. Cal. disconnect Diablo Canyon nuke and the legislature bans the purchase of power from UT and AZ coal generating facilities and Pacific Gas & Electric shuts down power during dry windy weather....and electricity starts getting scarce. It will then make sense :-)

BruceM

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Re: Utilities: a current review

"1.  The dividends are unsafe, politically

That is, utilities are regulated.  With the strong moves to socialism of varying degrees that may be coming, coupled with fed zero interest rate policies, one can make a case that utilities dividend yields now are way too high.  If the fed 10 year is at 0.55%, then utilities shareholders yield should be comparable...plus perhaps a little.  In the extreme, utilities should pay no dividends...use that money to convert to clean energy."

A couple of forces at work here. Utility (and other) high dividend current yields are really determined by the market. The 10-year Treasury yield spread usually exists in a fairly tight band for utilities and REITs, so clearly as that interest rate drops, Utility priices will likely climb and yields fall.....all other factors equal. This will have little to do with politics.

In the early 80s, as I recall, when nukes were a hot topic, one of the national suggestions was to nationalize utilities and cut out the dividend. On the surface this seemed like a sure way to reduce the cost of nat gas and electricity. Fortunately, reason prevailed as it was shown that dividends are simply a cost of access to cheap capital and using exclusively debt markets would increase the cost per KWH while government underwriting, like all other government underwriting, would gradually make it insanely expensive.

Actually, the single greatest threat to regulated electric utilities is a 1859-strength Coronal Mass Ejection. For those parts of the planet facing the sun when this hit, would see their electric grids decimated and require many months or ever longer than a year to get all the fried transformers, relays, regulators and even burned wires, replaced. Like leisure corporations today, revenues would drop to zero or close to it. But were this to happen, I think utility share prices would be the least of our worries.

BruceM 

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Re: Utilities: a current review

I've seen a number of respondents thinking of holding FE. I've not looked at it before, so I went ahead and dropped in from TIKR, 19 quarters of data. Here are the results

FE rev per share.jpg

Woops. Now, interest expense as a % of [CFFO + Interest]

FE int per share.jpg

Over past 4Q, that's about 34%?!? Ok......what kind of return on investing activities...

FE cffi per share.jpg

Well, at least the new spending beginning 4Q18 up to 3Q19 stopped the downward decent of operational cash flow, perked it up for a quarter with it going flat past 4 4Q rolling periods.

And finally dividend history

FE div growth.jpg

The dividend to Net CFFO POR (not shown) is not bad at about 31% over past 4Q, meaning the dividend is well covered. But other than that, I see nothing to like with this utility. Its cash flow progression is seemingly going in the wrong direction. Were it not for the adequate coverage of the dividend, with that interest expense, I'd say this stock is on track for a dividend cut.

FYI

BruceM

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