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PG&E and Edison Stocks Generate Shift in Capital

October 05, 1994|TOM PETRUNO

Amid extremely heavy trading in shares of Pacific Gas & Electric and in Southern California Edison parent SCEcorp on Monday, a large investor is rumored to have cashed in PG&E stock to buy SCE.

Knowledgeable Wall Street traders named that investor as Los Angeles-based Capital Group, the giant mutual fund company considered to be one of the country's savviest market players.

By exchanging shares in PG&E (which serves Northern California) for SCE (which serves much of the Southland), it's doubtful Capital Group would be making any judgment about either stock's short-term prospects. That's because the firm tends to be a very long-term investor. Nonetheless, Capital obviously sees some kind of merit in SCE stock, which has been one of the worst-battered utility shares over the past year.

In Monday's trading, 7.3 million shares of PG&E changed hands, making it the most active New York Stock Exchange issue. The same day, 4.4 million shares of SCE traded.

Most of the volume in both stocks Monday occurred in single mammoth "block" trades--a 5.7-million-share block of PG&E, and a 3.1-million-share block of SCE--and both of those blocks were handled by brokerage First Boston.

A strong indication that the seller of one block was the buyer of the other was that both blocks crossed the market within five minutes of each other. PG&E stock fell 87.5 cents to $21.875 on Monday, while SCE shares rose 50 cents to $13.375.

Capital Group, as is its policy, declined to discuss its trading. But traders and analysts believe that Capital decided to reduce its huge stake in PG&E, which totaled 15 million shares as of spring, and take a substantial position in SCE. Until now, Capital has owned little of SCE.

Both stocks have suffered the double whammy of surging market interest rates and mounting competitive worries this year. Higher rates have depressed all utility stocks, driving their dividend yields up. But the competition issue has been more pronounced in California than in many other states, because regulators here have suggested a bold plan to allow big electricity consumers to choose any power source by 1996.

Partly responding to prospects for dramatically increased competition--which naturally could crimp earnings--SCE in June slashed its annual dividend from $1.42 a share to $1. The stock, in turn, has plummeted from its all-time high of $25.75 in 1993 to $13.25 now, a 48.5% drop.

PG&E, meanwhile, has collapsed from a peak of $36.75 in 1993 to $21.75 now, a drop of 40.8%. That decline occurred even though PG&E increased its annual dividend this year--from $1.88 a share to $1.96. What's more, PG&E continues to insist that it sees no reason to cut the dividend anytime soon, even with greater competition looming.

Wall Street's rough treatment of PG&E stock, however, suggests that many investors believe a dividend cut is inevitable. At the current stock price, the dividend yield on PG&E is a whopping 9.0%. That contrasts with a 7.5% yield on SCE stock. If PG&E were to cut its dividend, the yield would decline automatically. Thus, by pricing the stock to yield 9.0% now, the market may already be factoring in a lower dividend.

Although the future of open competition for electric consumers in California is far from decided (regulators will be weighing alternatives well into 1995), Wall Street sees PG&E burdened under any scenario by its Diablo Canyon nuclear plant.

Depending on how quickly PG&E decides to write off the cost of that facility, earnings could be penalized by 30 cents to 60 cents a share, each year, for six to 12 years, says analyst Barry Abramson at Prudential Securities in New York. Even with such huge write-offs, he says, PG&E might be able to preserve its current dividend. "But they're not going to be raising the dividend for a long time to come," Abramson contends.

On the other hand, SCE--having already bitten the bullet and cut its dividend--now is in position to begin raising it again, if slowly, analysts say.

If Wall Street's rumor mill is on target, Capital Group, at least, has decided that the risk versus potential reward in deeply depressed SCE stock must rival or exceed that of PG&E stock.

Of course, it's worth remembering that there were buyers on the other side of the PG&E stock block as well. If the dividend isn't cut, and if interest rates eventually come down, PG&E's stock recovery could be dramatic. But those are two "ifs" for which the market won't yet give PG&E the benefit of the doubt.

Tale of Two Utilities

How Pacific Gas & Electric Co. and SCEcorp (parent of Southern California Edison Co.) stack up by various measures:

PG&E 1994 est. sales (billions) $10.6 1994 est. EPS* $2.60 Annual dividend $1.96 Stock 52-week high-low $36 3/4-$21 5/8 Tues. stock price $21 3/4 Stock decline from record high -40.8% Dividend yield at current stock price 9.0%

SCE 1994 est. sales (billions) $8.0 1994 est. EPS* $1.55 Annual dividend $1.00 Stock 52-week high-low $23 5/8-$12 3/8 Tues. stock price $13 1/4 Stock decline from record high -48.5% Dividend yield at current stock price 7.5%

*Earnings per share

Sources: Value Line Investment Survey; Standard & Poor's

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