Stock analysts see more voltage in electric utility issues
In searching for stock groups to plug into during the summer months, analysts are getting turned on by the electric utility issues. They're looking for a favorable market climate as interest rates begin coming down, the rate of inflation slows, and so does the rate of energy costs.
This year's coal strike had little influence on electric utilities, unlike the 111-day coal strike of early 1978 that dampened their stock prices. Management of most companies, in anticipation of a possible repeat of a prolonged strike, built coal inventories to about four-month supply levels.
Many electric operating companies have formed holding companies, so their move profitable nonutility subsidiaries are excluded from regulation. Besides such diversification moves, the electric utilities have become more aggressive in pricing and have shown what one analyst describes as a "more businesslike approach" to construction projects.
K. Adam Leight, an analyst with Sutro & Co. in San Francisco, says efforts of the Reagan administration and the Federal Reserve Board, combined with general effects of the business cycle, should cool the soaring rate of inflation and depress interest rates.
"This environment will have a dual effect, making the shares of high-yielding electric utility companies attractive, total-return investments," Mr. Leight figures. Lower cost of funds will boost profit margins on high- leveraged utilities and, with sliding interest rates, should spur interest in high cash dividents.
Because of utilities' more aggressive relief applications, state utility commissions have begun awarding "significantly" higher rates, he notes. On the legislative scene, there have been favorable developments regarding nuclear power, air pollution regulations, and fuel use restrictions.
Tax incentives for dividend reinvestment and depreciation of plants also seem likely in the future. "These programs will improve utilities' operating environments and will lead to higher rates of companies' earnings and dividend growth," Leight predicts.
Joseph Garcia, an analyst with Dean Witter Reynolds, believes that the perception of the electric utility industry is changing and that the next few months could be a "critical time," with investors regaining their view of the industry as a long-term investment alternative.
Diversification will also initiate long-term investment, he adds. As utilities make presentations to investors that focus on diversification and earnings from subsidiary operations, the perceptions of the industry will change and sharpen, Mr. Garcia contends.
At Bache Halsey Stuart Shields, analysts Gerald Morgan, Eileen Doris, and K. J. McIntyre have come up with a "Top 10" list of favorites. Stressing that income is the main attraction of electric utilities, their picks are Carolina Power & Light, Consolidated Edison, Duke Power, Florida Power & Light, Florida Power Corporation, Potomac Electric Power, Public Service of Indiana, Southern California Edison, Texas Utilities, and Virginia Electric & Power.
The trio of Bache analysts says these selections all have strong fundamentals , a constructive regulatory environment in the areas they serve, and well-defined earnings and divident prospects. "These 10 companies represent a variety of geographic concentration, quality rankings, and sources of fuel generation," they said in a recent report.
Leight picks from Western electric utilities, noting that customer load growth in the Western states has been the fastest in the nation. It should increase about 1.75 percent this year. His picks are based on "superior" dividend growth potentials and high yields for income and total-return accounts.
On Leight's list are Central & Southwest, Hawaiian Electric, Nevada Power, Pacific Gas & Electric, Public Service of New Mexico, Southern California Edison , Utah Power & Light, and Washington Water Power.