UTILITY company stocks - once considered the ultimate ``safe haven'' for conservative investors - are under fire.
Many financial professionals are cautious about the stocks. Utility companies face a hostile climate of rising interest rates -
making alternative investments such as money market accounts attractive - and stepped-up competition from diverse energy sources.
The adverse climate has been particularly difficult for electric utilities, which face the most competition from new energy suppliers. But utility stocks in general have fared badly in recent months; since September 1993, the Dow Jones utility index has skidded downward 30 percent.
Wall Street is concerned by the dip, since a dropping utility index often has preceded, typically within six months, a comparable decline in the Dow Jones industrial average.
In 1968, for example, utilities plummeted 33 percent and the Dow Jones industrial average fell 34 percent; in 1988, utilities tumbled 31 percent and the industrial index skidded 37 percent. So far this year, the downward ``correction'' in the Dow industrials index has been about 10 percent.
Conservative investors beware
``For gutsy investors, there's still a lot of good buys among utility stocks,'' says Milton Schlein, an associate research director with Value Line, a New York investment research/advisory service. ``But we are now telling our clients that conservative investors should not be making major new commitments to this group at the present time.''
Value Line's analysis is a case study of the rising concerns about utilities. Last year, the group issued reports that said utility stocks and bonds offered safe and steady income. Indeed, utility stocks seemed to offer superior returns to bonds, the reports noted, whether interest rates were rising or falling. Value Line held that utilities provided the possibility of rising income from dividend increases, compared with fixed payments from bonds.
Value Line has issued a number of new reports in recent months, all of which suggest caution.
On Sept. 24, 1993, at about the time utility stocks were peaking, Value Line said dividends might grow at a slower pace in the future, given deregulation and greater competition. That is exactly what has happened, Mr. Schlein says.
On May 20, Value Line noted that utilities had been performing more poorly than bonds; on May 24, it said utilities had lost some of their appeal as defensive stocks, Schlein says.
Much of the reason for the decline in electric utility stocks since last September is linked to the hike in long-term interest rates, according to a study by Barry Abramson, an analyst with Prudential Securities Inc. Utility analysts for Prudential say electric utility stocks, which are interest-sensitive, could fall another 10 percent to 15 percent in 1994.
But rising interest rates do not explain all the weaknesses now evident, the Prudential experts argue. Deregulation will also help drive down utilities. James Dobson, an analyst with investment house Donaldson, Lufkin & Jenrette Inc., says he sees the ``likelihood of a longer-term deterioration in fundamentals'' for the group, stemming from deregulation.
The National Energy Policy Act, enacted into law in October 1992, greatly increased competition within the industry. A number of utilities subsequently negotiated rate discounts, which cut into profits and dividends. And many large utility customers are finding it cheaper to build their own generating plants.
On June 7, the California Public Utilities Commission took comments from interested parties regarding a new proposal, which would establish what the industry calls ``retail wheeling.'' Starting in 1996, customers would be allowed to access the local electric transmission system in order to bypass the local utility, and, if they desired, purchase power from any other supplier.
Prudential analysts say ``wheeling,'' if it were eventually enacted in California or elsewhere, could hurt high-cost producers and benefit low-cost suppliers.
Consumers would reap the benefits of lower utility bills.