Electric Utilities Popular Again

Article excerpt

Buy two electric utility stocks and call me in a decade.

That was the time-tested broker prescription for conservative investors in need of steady income with no negative side-effects.

Again in 1996, stock market volatility has made the electric utility stock a favored antidote for investor motion sickness. Yet it's no longer such an automatic prescription because electric utilities are no longer a sure thing.

Industrial customers, willing to take business elsewhere, are demanding that utilities provide them with the lowest-cost energy possible. Mergers, once rare, are coming fast and furious.

"It's hard to recognize a utility anymore as we move toward total energy companies that include electricity, natural gas and other forms of energy," William Griggs, chairman of Duke Power, told me during a recent interview on "Today's Business" on the CNBC cable television network. "There's a lot of speculation about acquisitions, and you'll see more occurring as the market differentiates winners from losers."

International power and energy trader Enron Corp., a one-time gas-pipeline company, is buying low-cost electricity producer Portland General for $2.1 billion in a stock transaction, creating the seventh-largest electricity seller. It's one of a number of big merger deals in the past year.

"In the transition from a monopoly to a competitive power generation market, companies must get together to cut costs, increase market share and build greater critical mass for future growth," explained Douglas Fischer, analyst with A.G. Edwards & Sons.

Utilities now compete not only against other utilities and unregulated generators of power but also against marketers that buy and resell power. Competitive pressure squeezes bottom lines.

"One-third of electric utilities had to cut or eliminate dividends in the past decade, while Public Service of New Hampshire and El Paso Electric went bankrupt," said Raymond Moore, analyst with Dillon Read.

Yet electric utilities retain their pluses. The average dividend yield is a hefty 6.2 percent, even though there's been little growth.

"Electric utilities historically perform better than the overall market in periods of market uncertainty, though I've been disappointed in their defensive characteristics this year," said John Lennon, lead portfolio manager for the Colonial Utilities Fund, which has half its $1. …