Electric Utilities Are Beginning to Lose Some Allure

Article excerpt

Love me, love my electric utility stock.

That's been the sentiment of conservative investors whose passion for yield-producing holdings usually endures for decades. The average electric utility dividend yield, after all, is a hefty 6.7 percent.

This love affair may be ending.

Down more than 20 percent in value from their record high set last fall, electric utility stocks have been severely wounded by rising interest rates. Admittedly, the worst is now probably over in terms of rate concerns. Many experts believe long-term rates aren't going anywhere, and others expect they will actually decline if the Federal Reserve boosts short-term rates further.

But of much greater concern is ongoing industry deregulation, which renders these stocks considerably less of a sure thing.

Utility regulators in California, traditionally on the cutting edge, recently proposed changes to permit all that state's customers to buy electrical power from providers other than traditional utilities if they wish. This option would begin in 1996 with large industrial customers, expanding to all customers by the turn of the century. Electric utilities would retain power transmission responsibilities.

"Electric utilities will become more risky, changing the perception of them as defensive vehicles," warned James McFadden, an analyst with Bear Stearns.

Worried shareholders may be switching to real estate investment trusts, telephone utility stocks or the safety of principal offered by bank certificates that now feature higher yields. …