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Lindley Estes is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.
Will electric cars give utility stocks a boost?
This was my investment column for the week:
UTILITIES aren’t traditionally what come to mind when thinking of investments poised for growth.
But the companies that power our homes seem well-positioned to reap gains in coming years. Utilities also pay rich dividends in a low-yield investment environment, and they have strong competitive advantages.
Just about every day now there’s a business news article about the electric cars coming out soon.
The U.S. government has offered customers who buy an electric car a $7,500 tax credit in order to bolster sales of the vehicles, which are seen as more environmentally friendly than gas-powered cars. That reduces the country’s dependence on foreign oil.
But electric vehicles still rely on fossil fuels for power. Their huge batteries consume ample electricity, most of which is produced by coal or natural gas. An Associated Press article this past week said charging an electric car uses the same amount of electricity as a small home. That spells both challenges and opportunities for utilities, which are working to upgrade their capacities in the face of added demand.
Some of the biggest, traditionally smartest U.S. companies have been heavily investing in both natural gas and utilities themselves due in part to these growth opportunities.
Energy giants ExxonMobil, Chevron and ConocoPhillips have all made multibillion-dollar acquisitions of natural gas companies in the past several years. The deals have come amid falling natural gas prices, which has led analysts to pan the investments. But all of the communications released by the energy firms have focused on the deals’ long-term prospects.
Warren Buffett’s Berkshire Hathaway owns two natural gas pipelines and a growing portfolio of utility companies. Buffett is on the record as saying he’s looking for more utilities to buy.
These companies have the competitive advantage that Buffett looks for. It takes billions to replicate the assets they have in place, and government regulation makes it even harder for a competitor to enter the market. Because they’re regulated, utilities can’t raise customer prices at will. But they can invest in new technologies that will allow them to reap greater profits as demand picks up.
As investors wait for the growth to materialize, they’re paid a nice dividend for owning utilities. Vanguard’s utilities exchange-traded fund (VPU) was recently yielding about 3.7 percent, a full percentage point higher than the 10-year Treasury bond. And its prospects for capital gains are far higher.
Utilities aren’t ever likely to give investors the kinds of eye-popping returns that high-fliers such as Apple and Google have thrown off. But for conservative investors looking to dip their toes into the stock market, get a nice dividend and have the chance for some gains, there are worse places to be.