Utilities sector

[vbin]

I have a question for you Fenders and Eric, please help me validate my understanding here. why long end of curve increasing interest rates are bad for UTEs stocks? Is it just becouse they are debt intensive business and have to borrow a lot? But that doesn't make sense becouse most of them have already borrowed. It's not a variable rate that they borrowed. Is it becouse market is forward looking and if these companies have to refinance(impending debt etc) that will be more expensive, if the yeilds stay high? But that would be true for any company with high debt not just UTEs.

[fenders53]

(03-04-2021, 09:23 PM)vbin Wrote: I have a question for you Fenders and Eric, please help me validate my understanding here. why long end of curve increasing interest rates are bad for UTEs stocks? Is it just becouse they are debt intensive business and have to borrow a lot? But that doesn't make sense becouse most of them have already borrowed. It's not a variable rate that they borrowed. Is it becouse market is forward looking and if these companies have to refinance(impending debt etc) that will be more expensive, if the yeilds stay high? But that would be true for any company with high debt not just UTEs.

It's never made complete sense to me and the market knee jerk reacts to it every time, at least initially.  Let me help you not understand it some more.    

-Yes they are very capital intensive and they borrow the money.  If rates are higher it's an expense and it will be passed on in the next rate hike.  Regulated utilities are allowed to be profitable and the level varies by state.  

-IMO the bigger issue lies in the fact they are traditionally income investments.  Recently some of them had dividend yields under 2 1/2%.  That's a big deal if the spread between the completely safe 10 yr gets too close.  If you bought the stock five years ago and the stock is up 40% (causing the yield drop), that's not such a big deal as you know your yield on cost is still very solid.  But what about the new buyer of your shares?  IMO a good utility stock is very similar to a decent DGI stock.  Better than many in fact.  All my utilities have outperformed KO and others for years.

-Back when interest rates were much higher, utilities commanded much lower PEs.  I assumed higher interest rates was much of the reason. 

-To your other point, many capital intensive company will in fact suffer if long rates rise for a prolonged period.  It hurts their margins and cashflow unless they can raise prices.  (inflation which might bring more interest hikes).  Momentum stocks usually get crushed, and many have already.  The Russell 2000 should be getting beaten up vs the large cap indexes.  That hasn't really happened.  My Russell ETF has outperformed all my other index funds for some time now.  Small Caps did have low valuations relative to the SPY and QQQ though, for several years at least.  Give the talking heads a few weeks and they'll think up a reason for whatever irrational thing the market happens to be doing.  Listening to them yap is exhausting sometimes.  Kinda like me telling you oil will be about $50 right now if you're lucky.  I wonder if they are hiring? 

[vbin]

Thanks Fenders. Eric do you have a kit of value okay too that u can share?

[EricL]

(03-05-2021, 01:52 PM)vbin Wrote: Thanks Fenders. Eric do you have a kit of value okay too that u can share?

I think fenders pretty much covered my thoughts, I don't know if I have much to add.

[divmenow]

The market never gets it right. Just play the opposites game and you will win every time.

I always say go against the grain lol

History has always said buy the utilities when there out of favor and sell when there loved. Right now there out of favor. Buy them, collect the dividend for a year and 2 and then do it all over again. Rinse and repeat lol

The only utilities I don't sell are NEE, DUK, AEP and XEL. Those are my 4 core holdings. The rest I buy but only to trade and collect the dividend for a few months, or a years. It all depends on where there located. I stay away from the ones on California or all heavily exposed to forest fires or hurricanes.

But that's just me. Some hold forever. And there's nothing wrong with that.

[ken-do-nim]

Ooh I particularly like NEE thanks for the tip.

[fenders53]

NEE overvalued forever and keeps delivering CAP and div gains. I would like to see them put up some new earnings growth this year to justify the price.

[crimsonghost747]

Anyone have Canadian Utilities? Or their parent company ATCO?

Particularly looking at CU here, seems fairly priced, super well diversified and while dividend growth has been kinda slow, the starting yield is pretty impressive at 5.8%. I haven't had the time to take a proper look yet though, so there might be something I'm missing.

[fenders53]

I am not knowledgeable enough in Canada regulations to have a strong opinion. I don't prefer my UTEs have much exposure to commodity price swings either. I leave those for Eric to understand. I tend to stick with my US favorites for utilities. I want this part of port to be boring and steady.

[fenders53]

Finally listened to all the year end earnings reports. The industry is truly moving fast. I listened to ALE-XEL-WEC calls back to back lol.

I was particularly impressed with WEC. They may exceed their 7% growth rate goal (EPS and DIV) by next year. I like their management and they exude confidence they can capitalize on the near term changes in energy policy. I think I like the risk reward vs NEE at this time due to valuation. They have no intention of eliminating natural gas from their Northland mix without a huge technological advancement that is likely a decade away or more.

XEL is in good shape as well. Both expecting to hit 70% of their 2050 goal by 2030. That is considerably ahead of schedule. They are purchasing some wind assets from ALE this quarter. 5-7% growth projections. Same on natty gas. I think they were both reading the same slide with the identical concerns. Token move towards EV infrastructure in progress. XEL and WEC both stated supporting industry fleet vehicle recharging was a near-term project if it picks up momentum with their industrial customers.

I was less inspired by ALE immediate future. Their region's economy (regulated portion) is just not going to awaken from Covid quite as fast. I got the impression 5% growth was going to be a challenge. They are already at 50% renewables though and intend 70% by 2030. They have no solar yet but that is clearly their next move. This will probably be the only UTE I'll continue to attempt to trade as it is volatile within a modest range. Not meaningfully building this position unless it pulls back hard.

My DUK and XEC positions may be transferred to the above. I need to do a deeper dive into AEP as that position is pretty large. They are nowhere near as far down the transition path to renewables last time I researched.

[ken-do-nim]

I appreciate the research. Sounds like I can start with WEC, XEL, and NEE.

[fenders53]

(03-11-2021, 10:13 AM)ken-do-nim Wrote: I appreciate the research.  Sounds like I can start with WEC, XEL, and NEE.

I'm confident enough to make them core holdings as I get real close to actual retirement.  I'll keep an eye on them for you.  Do yourself a favor and pull up a 10 yr chart on your brokerage software.  Compare these three with a couple higher yield today low growth UTEs like ED and DUK.  ED and DUK are solid, but I don't need that extra couple bucks in dividends now and give up the share price runs.  I am up 10X on XEL pre-merger.  Eric put me on to WEC and half talked me into NEE several years ago.  These aren't UTEs for 80 yr old men.  They are true DGI stocks.  They outperform some of my DGI stocks and I expect that might continue.    

I can't know if rates will rise and UTEs get hit more, but they are way down off their highs.  Just average in and maybe DRIP them.  I doubt you will regret it.  Sometimes they go up on days your high growth is getting whacked.  That's not a terrible thing IMO.