The Next Buzzy Stocks Are … Utilities

Want a hot stock tip on an up-and-comer? That would be utilities. You know, the stodgy electric companies that live in a tangle of state regulation and don’t deliver blow-out earnings growth.

But utilities, an extremely underappreciated sector, are the contrarian pick of T. Rowe Price, the giant asset manager. In a news briefing in New York on Tuesday, portfolio manager David Giroux made a fascinating case for why utilities will be the star of the future, involving renewable energy sources and their rapidly improving technology.

The standard view of utilities’ future is that they will gradually get rid of coal-fired plants in favor of natural gas, which is cheaper and cleaner-burning. Not much excitement there.

The market agrees. Among the 11 S&P 500 sectors, utilities rank as No. 9 in terms of total return thus far in 2019, according to Yardeni Research. Up to now, it has generated 18.5% year to date, which isn’t shabby, unless you compare it to others. The S&P 500 overall averages 24.5%. The biggest winner is information technology, at 40.9%. The only two worse than utilities are health care (12.1%), burdened with political pressures, and energy (2.5%), suffering from lower oil prices.

Utilities have long been treated as a bond substitute, owing to their relatively fat payouts. The sector’s 2.9% average dividend yield is the lushest among stocks, other than that of real estate, which has the same number. Only energy, artificially buoyed by its low denominator (i.e., its depressed stock prices), has a better yield, at 3.8%.

Utilities’ payout beats that of the benchmark 10-year Treasury note, at 1.78%. And like Treasury bonds, utilities are viewed as very safe—with the obvious exception of Pacific Gas & Electric, now mired in Chapter 11 because of claims against it for California’s deadly wildfires.

What investors miss, said T. Rowe’s Giroux, is that “the conventional wisdom about utilities is outdated.” It used to be that utilities depended upon building large plants, which enabled them to pump up power bills to cover the costs, if state regulators would let them. Unsurprisingly, new plants often suffered from huge cost overruns, which sparked the ire of the regulators. Utilities seldom increased their earnings.

But these days, Giroux argued, earnings are perking up. More important, renewable energy is getting better and cheaper, as technological advances come to solar panels and wind turbines. A lot of the current grid is growing old and needs to be replaced: Power plants generally have a 30-year lifespan, and many were built in the 1970s and 1980s. Giroux predicted that, in two decades, two-thirds of the nation’s power will come from renewables. Utilities “are no longer a rate play,” he said.

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Tags: coal, Natural Gas, S&P 500, solar, T. Rowe Price, utilities, wind

The Illinois Senate passed legislation that will consolidate 650 police and firefighter pensions, sending the bill to Governor JB Pritzker, who has said he will sign it into law.

The bill, which the senate passed 42-12, amends the Cook County Article of the Illinois Pension Code to allow for the pensions to pool their funds into two statewide funds for investment purposes – one for police and one for firefighters. It will also allow contributions to be taken from any revenue source, including, but not limited to, other tax revenue, proceeds of borrowings, or state or federal funds.

The move is intended to help improve the financial stability of the pension funds, while easing pressure on local governments to raise taxes to fund those pensions.

“Bipartisanship in this general assembly has achieved what none of their peers from previous general assemblies has been able to do,” Pritzker said in a news conference after the vote passed the state senate, “consolidate the jungle of police and fire pension funds that serve first responders in the suburbs and downstate.”

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Last month, a bipartisan task force on pensions created by Pritzker released a report that said consolidating the plans’ investment assets was the single most impactful step the state can take to address the underfunding of the police and fire pension funds.

“This step is immediately actionable and beneficial to the health of the plans, retirees, and taxpayers,” said the report.

If the more than $14 billion of suburban and downstate police and fire plans were to achieve investment returns like the other larger Illinois plans over the next five years, they would collectively generate an additional $820 million to $2.5 billion alone. That is the result of analysis by the state’s Department of Insurance The report also added that if they earn comparable returns over the remaining 20 years on their statutory ramp to 90% funded status, they would create an additional $3.6 to $12.7 billion in investment returns alone.

The Illinois Municipal League, a government sector lobbying association, lauded the passage of the bill.

“This has been a top priority for municipalities across Illinois for several years and will provide much needed financial relief to local governments and their taxpayers while also protecting the retirements of our public servants,” Illinois Municipal League Executive Director Brad Cole said in a statement. “While the latest compromise isn’t perfect, this is an important first step that will benefit employees, retirees and taxpayers across the state.”

Illinois Passes Police, Fire Pension Consolidation Bill

Move could boost returns by $2.5 billion over five years.