POWER PLAY. Utilities. Protection?

POWER PLAYBanner, Link to the Real

JULY 3, 2020
Link to the Real.  It Pays.


may call you mean.  Some may call you rude.  Some will stop calling you at all.  Yet, the truth matters and a fall from a tall building doesn’t create more.  You paid for more, not less.  Consider it.


 Power companies expect to be paid every month.  Promises won’t do.  But when you’ve paid to participate in the business, the results are all on you.  Utils are said to be “defensive.”  But from what?  Market crashes?  Capital loss?  Earnings reversals?  “No–it’s income” you say?  Nice.  Is it really income when your utility’s share price folds by double-digits?  How about if their EPS is in reverse?


Since our market was shoved off a cliff and unemployment bounced into the stratosphere, precisely what have the utilities done for you?  Have they kept the “defensive” promise?  Were you “protected?”  Or did you simply pay into a “POWER PLAY.  Utilities.  Protection?”



Cheerios, Caribe
Toasted Coconut Cheerios. Nice color. General Mills(GIS) has brought you 0% over one month, 14.8%YTD, and 19% over a year.  The last metric includes the 3.19% kicker they pay to keep you onboard.


into a cave for safety from a Sabre tooth is meaningless if the cave family living there punches a knife into your neck.  Naturally, seeking shelter amid a viral market collapse is sensible.  Defense can be a solid part of all that.  Cheerios and power plays can be good.  But don’t turn your back.  No one gets more sitting in the dark.


As anyone can see, this filthy plague isn’t done with us.  Any fix is yet in the mix.  Promising things are brewing, yet the mask and dodge will continue to prove our way.  On the stock front we’re again hearing talk of moving money back into defensive plays.  Hum.  We hear about the “barbell” as well–defensive plays matched by recovery buys.  O.K.  Yet, what’s playing defense bought us?  Would it have helped to own a utility play prior to the COVID pounce?



-The Story of Four-


Utils, 7-2-20
Consolidated Edison and Dominion Energy proved themselves savvy buys.  Both soared as the benchmark failed big.  As the S&P 500 burned, D & Ed spiked with contempt. And as the S&P’s initial recovery crested, they spiked further. Yet only Dominion proved capable of matching the benchmark, to this point. Right. The dividend isn’t factored in here(SJChart.)


any fixed payout can sound good as markets crash, smoke, and then chop.  A steady, predictable market uptrend proved our way for years.  Many also enjoy a steady, predictable payout.  But what’s beneath that?  Above we clearly begin to see how the utilities have treated shareholders.  With the exception of Dominion, those steady, predictable payouts, exist on top of  sinking share prices.


Our market is now far more complex, and treacherous.  Look left and the money routes right.  Change comes overnight–from defensive, to secular tech, cyclicals, to blast zone air and cruise lines, and even bankruptcy.  Think Pier One, Hertz, and JC Penny.  The initial rotation into consumer packaged goods(CPG) and utilities made sense, then.  However, precisely how much help have the utilities provided?



Utils, returns 7-2-20
Consolidated Edison held up the best during the initial COVID plunge. Since, it’s shambled zombie-like. The metrics display the fugly.  The green shows the goodness. Takeaway here?  Nextera is destroying everyone with ease. Over the past three years NEE has returned 89.2%. Over five it’s done 185.7%.  Are we sure it’s a util?(SJGraphic.)


knew?  Utils are like shoes in your closet, right–all fit?  Well, not really.  For those seeking income the utilities have proved one go-to.  Right–slower growth is part of that.  Power generation and distribution’s not tech, but it pays.  Not when the underlying share price crumbles, as we’ve just seen above.  SJ owned American Electric Power(AEP).  It’s been sad.  What happened to us?  We bought late and sat 10% beneath the waves for weeks.



-American Electric Power-

A broken story?

AEP, 7-2-20, weekly
It took macro-fugly to break AEP’s runs. AEPs ‘ long term results have been impressive–were impressive, prior to COVID. COVID’s market-wide stomp reduced AEP’s long-term return metrics significantly, along with splintering a beautiful near decade-long uptrend. What’d AEP ever do to COVID?(SJChart.)


price performance now dangles as if a string on a girder.  As the above chart, & graphic, both clearly display, the pandemic utilities are proving a story of under-performance.   Over the past month the utility sector has returned -0.74, while–wait for it–IT has expanded by 8.25%.  Only Energy, has done worse, at -3.8%.  Year-to-date Utilities rank 8th, down -7.2%, with Industrials -10%, Financials -20.7%, and Energy at -34.8%.  Meanwhile IT has climbed 20.7%.  All metrics are as of the morning of 7-2-20.


-Nextera, Duke Energy, Southern Company-

Utilities, NEE, DUK, SO
Nextera, Duke Energy, and Southern Company are savagely beaten along with the rest. None matches the benchmark ‘s performance. Is that protection?(SJChart.)


Dominion’s benchmark-matching performance, it’s one year return, with dividend reinvested is only half that of Nextera’s; D, 11.7% to NEE 23.3%.  In fact, it’s taken Dominion three years to return that same 23.3%, exactly.  Really–exactly.  Is that protection?  When you break it down that’s a very nice, historically, 7.7% annualized return.  It’s a utility after all.  Utilities are supposed to be sleepable.  D is, sleepy.  Over the past five years D has given you a very nice and steady 10% a year, every Fa King year.  And?



Only Dominion’s had the punch to match the benchmark, and there’s that gangster-big 4.57% payout.  What’s not to love?  D’s current payout ratio is an eye socket-bleeding 173.4%.  Oops.  A payout ratio of 100% means all available cash goes to payouts.  173.4% means more than simply scrounging couch cracks.  It means spending working capital to live.


So, let’s look at Dominion beside Nextera.  Dominion now pays shareholders greater than 2x over Nextera in dividends; D 4.57 vs. NEE 2.27%.  D bleeds to do that.  How long does that last?  Fact–no one knows.  Maybe it’s all good–but maybe not.  Often even the companies in such a position don’t know.  Income investors do love those chunky dividends, until they’re jerked out like some filthy rug, or the underlying share price folds.  Think MFA Financial.


Nextera sports a smaller dividend, but a very healthy current payout ratio of 69.8%.  It’s P/E is smaller at 33.5 vs. D’s staggering 38.5.  NEE’s forward P/E is higher at 25 vs. a reasonable 17.8.  Both sell at the same price/cash flow.  But you get NEE at half the PEG ratio, 4.1 vs. D’s 8.1.  That’s a huge difference.  Yes, utils aren’t sold on PEG ratios, normally.  That’s because they’re notorious for not having any growth.  NEE does.


When asked to list the top three things to look for when buying a stock, famed fund manager Peter Lynch replied “Earnings, earnings, earnings.”   O.K.  Although Dominion’s been growing the revenue line better than Nextera, exactly how much of that revenue’s been swelling D’s bottom line?  None, actually.  Over the past one and five year periods, D’s earnings have gone backward, by 1.27% and 5.85% respectively.  Earnings in reverse.  How well does that work?


Meanwhile, over the past twelve months Nextera grew its’ EPS by 20%.  That’s growth stock stuff.  Over the past five years it’s been a super respectable 7.25% annual average.  Impressive.  Yet, no one, alive, drives through the rear windshield.  Going forward NEE’s forecast to expand their EPS beyond that average, while tripling the EPS forecast of Dominion; 8.58% to 2.5%.  And you can keep the dividend.  Enjoy the 4th.  As always, good luck and good investing.




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