Bad to invest in utilities?

Question

Someone just told me that it was bad to invest in utilities because they don't "pay" well. I'm not especially intertested in dividends so excluding they "pay off" are utilities generally considered to be a reasonable investment. Btw, I'm interested in common stock if that makes any difference.

Answer 1

Utilities are not considered growth investments as such.  They are mainly bought for their relative safety and dividends.  The main problem with utilities as investments is that their return on investments are set by government agencies.  Hearings in rate cases can take years.  And many times the agencies do not allow a reasonable roi as they are public agencies.  There are different types of utilities also.  What normally pops into mind when utility is mentioned is electric utility.  But in addition there are gas utilities, water utilities, and telephone utilities among others.  That being said at times utilites are better investments than at other times.  Currently,  they might be considered a better investment than many others because their beta is much lower than the run of the mill equity.  DUK for instance has a beta of 0.57,  a dividend of 5.0%, but a PEG of 3.0  AEP has a beta of 0.83, a dividend of 4.0%, but a PEG of 2.2.  Those are two electric utilities.  PNY has a beta of 0.45, a dividend of 3.8%, and a PEG of 3.3.  It is a gas utility.

Answer 2

First, what are you calling a utility?  Only US gas and electric companies?  Worldwide?  Gas producers?  Sasol in South Africa, is a very interesting company.  They produce synthetic petrolium from coal, and they produce electricity.  South Africa is short of energy, so they should do well.  Chesepeake Energy produces natural gas in the US, they are drilling alot of wells, have been a hot stock and will continue to be a hot stock.

Answer 3

I'm not sure why the person told you they don't "pay" well, assuming he means dividends.  Historically, they mostly pay higher dividends than most stocks.

But they're not growth plays, so if you're looking for a screaming stock, a utility is usually not it.  Of course, the key is to purchase the right utility companies at the right time.

On the good side, they are a fairly recession-resistant stock.

Look, for example, at Progress Energy (PGN):  They've got a current yield of 5.8%, and they do most of their business by providing electricity to North Carolina, South Carolina, and west central Florida.  Nobody is going to stop using electricity, so it's a fairly stable market for it to be in.  It is growing slowly but surely.  Is that a s**y stock?  No.  Is it a dependable stock.  Likely.  But if you just want dependable income, maybe corporate bonds are better.

So no, it isn't bad to invest in utilities.  It is just a matter of what you want.

Answer 4

natural gas is the future!