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Overtaken by Current Events

As deregulation takes hold nationwide, electric utilities remain out of favor, their growth prospects uncertain. Analysts still have a few picks, however.

May 20, 1997|JAMES F. PELTZ

Widows and orphans, pay attention: Electric utility stocks aren't what they used to be.

Long valued for their steady, government-regulated rates of return and high dividend yields, the once-sleepy electric industry is now in a state of utter turmoil as deregulation of power suppliers sweeps the nation.

"It's a pretty confusing time right now," said Rick Eckenrodt, co-manager of the Lindner Utility Fund in St. Louis.

California and at least a dozen other states are moving to eliminate decades-old monopolies and introduce competition into electric energy. Earlier this month, California's Public Utilities Commission voted to allow an unrestricted market in the state--where customers spend $20 billion annually for electricity--by year's end, in an effort to reduce the state's notoriously high electric prices.

That's good for consumers. But many utility investors have raced to the sidelines until the dust settles.

"My major concern is that there's a major lack of predictability for both earnings and dividends" of utilities, said analyst Raymond Moore of Dillon, Read & Co. in New York, who does not have a single "buy" recommendation on any utility right now.

"I don't know what kind of growth rates to put on these companies," he said.

It's that attitude that has left many utility stocks lagging well behind the broader stock market for more than a year. While the Standard & Poor's 500 index has surged 24% over the last 12 months, S&P's index of 26 electric utility stocks has dropped 3%. Higher market interest rates, which make bonds more competitive with high-dividend stocks, also have hurt utilities.


Among California's three major providers of electricity, shares of PG&E Corp. (ticker symbol: PCG), the San Francisco-based parent of Pacific Gas & Electric, have risen only 2% over the last year, to $23.50 as of Monday. Enova Corp. (ENA)--the holding company for San Diego Gas & Electric, and which is planning to merge with Pacific Enterprises (PET), the owner of Southern California Gas Co.--has gained 8% over the last year, to $23.25 now.

In contrast, Edison International (EIX), the Rosemead-based parent of Southern California Edison, has been a standout: Its shares have jumped 42% over the last year, to $22.75 currently.

But overall, Edison's recent performance has been the exception rather than the rule. "I'm a value investor, which means I like buying stocks that are cheap and hated, and that seems to apply to the whole utility industry," quipped Sheldon Simon, manager of the $1.2-billion Putnam Utilities Growth & Income Fund. "This sector has been out of favor since the middle of 1993."

Nor is the situation expected to improve much soon, in part because more and more utilities are expected to slash their dividends to have the cash needed to compete in a deregulated market.

Many already have taken that step, such as Ipalco Enterprises Inc. (IPL), the parent of Indianapolis Power & Light, which shocked the industry by cutting its quarterly payout by 32% in April.

In other words, it's getting hard to justify buying a utility stock simply as a dividend play.

"The average electric utility [yield] is 6% and change, but you could get a [30-year U.S.] government bond for close to 7%, and with the government, I know I'm going to get my money back," Moore said.


Even if utilities have extra cash on hand after cutting their dividends, earnings growth in a more competitive market won't be easy to achieve, analysts said.

With deregulation, "electricity is going to be a commodity sold on price, [and] the company that has the lowest costs for their electricity is going to have the flexibility to do what they need to do to win customers," said David Thickens, analyst at brokerage Dain Bosworth Inc. in Minneapolis.

That's why he likes Public Service Co. of Colorado (PSR): The firm is "one of the low-cost producers in the industry" and thus is "well-prepared to face the rapidly changing utility environment," he said. The stock, now at $40 a share, is up 18% over the last year.

Barry Abramson, utility analyst at Prudential Securities Inc. in New York, has buy recommendations on several stocks--although none in California--that he believes are competitive companies with projected growth rates in earnings and dividends that will top the industry's averages.

Among Abramson's picks: CMS Energy Corp. (CMS), based in Dearborn, Mich.; Duke Power Co. (DUK), which provides power in the Carolinas; and Texas Utilities Co. (TXU), based in Dallas.

As for the California companies, Putnam's Simon said each one is embarking on a different strategy with the advent of deregulation.

"Enova happens to be one of my largest holdings," he said, "because they're on a strategy where they will be the most plain-vanilla company in the state," and that will be an asset amid the confusion of deregulation, he believes.

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