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One Bright Spot In Utilities

One Bright Spot In Utilities

If you consider a time span measured in years rather than days, weeks or months, it is hard to make a good case for investing in power utilities. Most are aware that over the next few years utility stocks are going to get hit with a double-whammy of epic proportions.

New EPA emissions regulations are going to force them to shutter many coal powered plants and move to cleaner energy sources. The U.S. Chamber of Commerce has estimated that this will cost utilities $28.1 Billion a year. No doubt some of those ongoing costs will be passed on to the consumer, but the initial cost of transition will be huge and not welcomed by an industry that is already highly leveraged.

That is not a good scenario from a fundamental profitability standpoint, but the price of the stock of electricity producers will also likely come under pressure for another reason. Much of the value of these companies to investors has traditionally been as income producing instruments. The industry as a whole has an average yield of around 3.5 percent, about 1.5 percentage points above that for the S&P 500. That, combined with the inelastic nature of electricity demand has made them a favored defensive play for income seekers.

The downside to a high yield is that it makes stock prices sensitive to moves in interest rates, and that could well prove a vulnerability over the coming years. The Fed may continue to delay the inevitable, but at some point most believe that interest rates will begin…




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