When I was a kid growing up, I used to love playing Monopoly. But I never sought to own the utilities, because unlike the other properties you couldn’t build houses or hotels on them once you accumulated all of them. That means that if someone landed on one of your utilities late in the game you couldn’t bankrupt them. By contrast, if you owned Park Place and Boardwalk, and had either 4 houses or a hotel on a property that someone landed on, you could very easily bankrupt them and win the game.
Needless to say, Monopoly is just a game. Except many investors look at utilities much the same way that I looked at them when I was a kid playing monopoly: utilities offer limited returns, so I would rather purchase something else.
But as people get older, and presumably wiser, their risk tolerance changes. They are no longer willing to assume a lot of risk to have a chance at handsome returns. Their investment horizons change and they tend to place more value on solid, predictable returns.
That type of investor should consider investing in utilities that pay a nice dividend. After all, most utilities provide investors with solid returns and peace of mind. And some even have the potential to grow at healthy rates and beat the S&P.
What Utilities Should You Consider?
American Electric Power Company, Inc. (NYSE:AEP)
With more than 5 million customers in Arkansas, Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Tennessee, Texas, Virginia and West Virginia, American Electric Power is one of the largest utilities in the United States and one of the nation’s largest generators of electricity. Furthermore, it owns the nation’s largest electricity transmission system. So if you are thinking that this company is close to a monopoly, you might not be all that far off--except that the sector is highly regulated and this company was recently ordered to restore rates for small business customers following complaints that electricity bills had risen by unreasonable amounts. On the positive side, American Electric Power Company, Inc. (NYSE:AEP) has a solid balance sheet, is well-managed, and has a track record for delivering results. On the negative side, adverse weather could impact operations and the company operates in a capital intensive industry. Overall, AEP is an attractive defensive opportunity that offers a solid annual return (dividends and moderate share price appreciation) in the 5% – 15% range with limited downside risk.
Exelon Corporation (NYSE:EXC)
Similar to American Electric Power, Exelon is one of the largest utility companies in the United States and one of the nation’s largest generators of electricity. On the one hand, Exelon’s stock price has been whacked and it is trading close to its 52-week low. On the other hand, Exelon’s shares have underperformed the market, the company recently cut is quarterly dividend to 31 cents, state regulatory commissions closely monitor Exelon Corporation (NYSE:EXC)’s return on equity, and Exelon’s nuclear-powered generation fleet is becoming less and less economical compared to alternatives. Oh, and don't forget that many analysts are forecasting that earnings will continue to decline. All in all, I feel that there are a lot of negative expectations built into Exelon’s share price. Even so, I see moderate to limited potential for share price appreciation (unless the price of natural gas increases) and expect a solid total annual return in the 5% – 10% range.