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JOHN F. LAWRENCE

Utility Stocks: Hard Lesson in Complacency

October 13, 1985|JOHN F. LAWRENCE

One of life's sadder moments is to be asked to help an elderly relative with her investment portfolio and discover that almost everything is in utilities and has been for 15 years or more.

Back in the 1960s, it was, of course, the thing to do. Utilities were safe, paid a high dividend and provided just enough growth to keep pace with inflation.

Who could have predicted all that went wrong?

Moody's utility stock average peaked at 120 in 1965, then the disaster began. By the time sky-high interest rates and inflation, the energy crisis and the troubles with nuclear plants got through with them, utility stocks had all but collapsed, leaving the average at a mere 39 in 1974.

Things have been better since. The average was as high as 95 this year and lately has been running in the mid-80s. But utilities are still anything but a universal investment for those who need safety and a stable income.

Some of the big power companies have come back, thanks to good management and the easing in the inflation rate. Slower growth in power consumption has moderated the need for capital to expand.

Worst Shape Ever

Many others are in the worst shape ever, caught in the midst of costly nuclear power construction programs at a time of tighter regulation and little need for the capacity those plants were to provide.

In many of those cases, the high dividend rate has turned into a zero dividend rate.

"Twenty years ago you could have thrown a dart to pick a utility stock and not worried about the dividend," says Leonard Hyman, utility analyst for Merrill Lynch in New York.

Now, Merrill Lynch rates a long list of utilities as no better than speculative investments.

There's probably no way to calculate the number of lives affected by the utility stock debacle. Almost certainly, it has had an impact on the living standards of vast numbers of retirees who thought they had invested soundly.

There are some simple lessons in it for all of us. One is that what is sound today may change tomorrow.

Those most severely affected are people who made utility investments and then forgot about them, a common failing, particularly among the elderly. Another lesson is that diversity in a portfolio doesn't mean holding lots of stock all in the same industry.

A word might be said about the brokerage community, as well. At times it tends to push certain investments too hard, in this case often touting high dividend rates without suggesting the need to look more deeply at risks or to avoid putting too much in one basket.

Shortage of Advice

This points up another problem: The shortage of good, continuing advice readily available on financial matters for the growing elderly population. Most often, it takes a younger relative to discover the problem and to attempt to balance the portfolio.

In too many cases, however, that comes far too late. The question becomes what to do with all that utility junk now.

Hyman offers no simple answer. Where there are unfinished nuclear facilities and regulators unwilling to provide the rate structure to pay for them, he says to sell even at the depressed price. He figures those stocks will continue to do more poorly than the overall market.

Don't be misled by high dividends, he cautions. One company is paying 22% but might soon be paying nothing.

For the stronger utilities, dividend rates remain fairly high--a bit under 9% a year with prospects for perhaps 4% or 5% growth in the dividend yearly, he says.

That means these stocks promise a return slightly in excess of long-term bonds. Where the dividend plus growth don't match the bond rate the stocks aren't a good buy, he observes.

As if the utility stocks hadn't suffered enough, the prospect that tax-free dividend reinvestment provisions in the tax code will die at year-end are another negative.

There are, of course, a handful of utility stocks that still come highly recommended. It's a far cry, however, from the days when utilities were almost all in vogue, something a lot of retired people would as soon forget.

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