Most investors don't think of power, natural gas, communications and water as growth businesses. Ironically, for more than 100 years no industries have grown more reliably. Perhaps more surprising, the key to successful investing in industry stocks has been to follow the growth.
That's food for thought here in summer 2011, as investors fret about everything from sluggish economic growth to the financial health of the federal government.
Utility stocks are, of course, hardly immune from general market trends, at least in the near term. They didn't crash as hard in 2008 as most stocks, or even as they did in 2001-02 following the implosion of then-industry leaders Enron and WorldCom.
But the electric-heavy large-cap Philadelphia Stock Exchange Utility Index did fall more than 45 percent from its late 2007 top to March 2009 bottom, enough to jolt even the steadiest investor.
Even energy pipeline companies--many of which today sit near all-time highs--suffered a mighty whack in 2008. And while water utilities generally held their own, they also had some scary days. The difference is these stocks kept paying and increasing dividends even at the depth of the crisis.
The 2008 credit crunch/market crash/recession panicked consumers, bankrupted businesses and caused banks to shut their doors. But Americans still demanded electricity, heat, water and communications.
Revenue flowed to utilities, which after six years of shedding debt and operating risk were at their financially strongest in decades. And as a result recovery was only a matter of time.
Market history is clear that major debacles never occur when the consensus expects one. Only then will enough money be leaning in the wrong direction to trigger real panic.
That's one big reason I'm still cautiously optimistic on 2011.
Companies have been able to use two years of record-low corporate borrowing rates to eliminate refinancing risk, slash interest costs and raise capital for further low-risk growth. And management remains conservative, investing only in low-risk projects and controlling debt.
Even my favorite utilities would fall in a reprise of 2008. But just as following that crisis, recovery will be swift and sure. And as I tell readers in my InvestingDaily.com article, Dividend Investing and the Debt Ceiling: How to Play the Waiting Game , the only real losers will be those who bail at the bottom.
More important, my favorite utility stocks face few obstacles to continued robust and reliable profit and dividend growth for years to come. And that puts them squarely on track to build our wealth.
The table "Growth Industries" makes the case for growth very plainly, showing expected capital spending on essential service industries over the next 20 years. Such projections almost always over or undershoot, mainly because market, economic and regulatory conditions change.
Making even a fraction of that investment, however, means markedly higher profits and dividends for utility companies. The Alerian MLP Index of the 50 largest energy master limited partnerships has a total market capitalization of $154.4 billion, for example. That's less than half the US Dept of Energy's most recent 20-year estimate of the needed investment in pipelines.
Similarly, the Philadelphia Stock Exchange Utility Index of the 20 biggest electric companies has a market cap of $327 billion, versus projected system investment needs more than twice that high.
AT&T ( T ) and Verizon Communications ( VZ ) together spend nearly $40 billion on their networks annually, 10 times the rest of the US telecoms combined. Yet that's just 4 percent of the projected $1 trillion in system capital spending for the next 20 years.
Aqua America ( WTR ) and American Water Works ( WTR ) are by far the two largest investor-owned water utilities with combined market capitalization of barely $8 billion. That compares to more than $300 billion in projected spending needs on the US water system over the next two decades, and the only alternative investors are cash-strapped municipalities.
That's the fuel behind the dividend growth of my favorite companies that I track for my financial advisory services website, Utility Forecaster . And it's just the latest phase of a trend firmly in place since the late 19th century, when these industries were born.
As for the here and now, conservative operating and financial policies have left companies cash flush at the same time investors' appetites for dividends have grown. And the more companies invest in their businesses, the greater their ability to boost payouts.
Dividend growth is the best possible insurance against inflation and against credit risk, the primary dangers facing income investors who by necessity must buy and hold to collect the cash.
Growing dividends not only keep pace with inflation. They're also the best possible sign the payout is safe, as it couldn't be increased otherwise. I discuss this in more detail in High-Yield Investing: How to Find Sustainable, Reliable Dividends
Dividend growth is also the surest way to a rising stock price. Stock prices go up and down for many reasons in the near term. But sooner or later they adjust upward to the higher dividend level, triggering capital gains.
A disruption in the overall market this year may defer the reward. But sooner or later dividend boosts show up in share prices--another reason to have great expectations for the rest of this year and beyond.
Roger Conrad is the editor of Utility Forecastor the nation's leading advisory on essential services stocks, bonds and preferred stocks.
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