Utilities Losing Spark Regulations, Interest Rates May Zap Stocks

Article excerpt

Utility stocks have long been the backbone of conservative portfolios because they're considered safe and pay above-average dividends.

Now, utility stocks are looking less attractive, and analysts say retirees and other risk-averse investors should consider searching elsewhere for yields that could rival the 4.5-percent to 6-percent rates offered by utilities.

"If interest rates move up sharply, that's a real threat to utility stock prices," said Leonard Hyman, analyst at Merrill Lynch & Co.

Utility shareholders also are being hurt by regulatory curbs on rate increases, lackluster earnings and slow dividend growth, stiffer competition, and stock prices already at record levels.

Other dangers also lurk, such as the merger mania sweeping through the telephone and cable television industry, analysts said. Phone companies may become stingier with payouts if they decide to divert money from dividends to acquisitions and new technology.

As a result, the time may be ripe to pocket your gains in utilities, said Michael Shroeder, who manages about $62 million for First International Asset Management. "Many of our clients are retirees who had fairly large holdings in utility stocks over the years and done well with them," Shroeder said. "The combination of rising interest rates and deteriorating industry fundamentals led us to believe that now's the time for them to reconsider whether they want a large exposure to utilities."

Shares of electric and phone utilities have retreated in the past two months from record highs amid signs that the economic recovery is gathering momentum, raising concern about inflation. Inflation erodes the value of fixed-income investments. Because the dividend provides the bulk of a utility stock's return, utilities are viewed as a proxy for bonds.

The Dow Jones utilities average is down about 12 percent from its all-time closing high of 256.46 set Sept. 13, one month before the yield on the 30-year Treasury bond dropped to a record low 5.77 percent on Oct. 15.

A strengthening economy that's accompanied by inflation would sap demand for high-yielding, slow-growth stocks like utilities. "The problem with utilities is you get the yield, but the prospects for growth are just not there," said Jim Lovelace, one of the managers of the $2.6-billion Capital Income Builder Fund. "We find better opportunities with non-U.S. utilities."

Searching For Yields

If steady yield is what you want, other stocks such as oil companies and beaten-down growth stocks like Philip Morris Cos. offer competitive payouts with better growth prospects, money managers said.

The Standard & Poor's international oil index of six companies sports a yield of 4.46 percent, for example, and oil companies have a better history of raising dividends than do utilities. Chevron Corp., which yields 3.89 percent, probably will raise its dividend, said Robert von Pentz, chief investment officer of the $2. …