Saturday, June 16, 2001

Personal finance

Take a new look at utilities

        Ever yell at the kid who left the back door open with, “Hey, we're not trying to air-condition the whole neighborhood?”

        Or what about quipping at the one who perpetually leaves the bathroom light on with, “Aw, come on, it's not like we own stock in the electric company!”

        Well, why don't you? I mean, add some energy and utility stocks to your portfolio?

        Once safe, defensive stocks — like Hush Puppies — comfortable and long-wearing while not the most fashionable — some utility companies are poised to gain from the deregulation trend.

        “The industry is under tremendous change right now as a result of deregulation,” said Mark Demos, an energy and utilities analyst at Fifth Third Bank.

        “Utility investing today is not the same utility investing as five years ago.”

The year that was

        Just look at 2000: Utility stocks shined.

        The Standard & Poor's Utility Index, a measure of the 40 utility stocks in the S&P 500, gained 54 percent last year. Reinvesting gross dividends (as utilities tend to be high dividend-payers) would have produced a 60 percent return.

        Local electric company Cinergy Corp. was in the game, gaining 47 percent in price appreciation but 57 percent with reinvested dividends.

        The huge gains came on the heels of a time period in which electric utility stocks were not much more than an investing afterthought, and no self-respecting investor would get near them.

        Then the technology market imploded, investing tastes changed, and steady stocks with earnings and dividends became trendy again.

        Meanwhile, the demands of the new economy sent demand for electricity soaring. That and deregulation have pushed prices higher and increased revenue.

        And that, in turn, has sent the stock prices on their bright rising path.

The year to come

        Not that the gains of 2000 will be repeated, but there could still be money to be made in utility stocks, Mr. Demos said.

        But which stocks and what kind all depend on the goals and risk tolerances of the investor.

        Changes in the industry are creating two kinds of utility companies: those dealing in electricity generation and those dealing in electricity distribution.

        Making the electricity is now deregulated; supplying it to our homes is still regulated.

        The division of the industry means there will be winners and losers in the deregulation process, Mr. Demos said. Those making the electricity have a higher growth potential, thanks to endless demands and disappearing oversights — but that also means a greater risk.

        And that means people trying to buy a utility for its stability and safety might be shocked.

        “They'll think they're getting a safe utility, but the industry is undergoing a fundamental change,” Mr. Demos said. “Just make sure, because utility companies are not what they used to be, that what you buy fits your risk profile.”

        Amy Higgins writes about personal finance for the Enquirer. You can reach her at 768-8373;; or Your Money, The Cincinnati Enquirer, 312 Elm St., Cincinnati 45202.


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