October 04, 2002
Utilities: They're Not Just for Widows and Orphans Anymore
by William Baue
Utilities may represent a wise investment in this bear market, especially for socially responsible
investors seeking to capitalize on companies that have the best environmental records.
Conventional wisdom says that utilities stocks are for "widows and orphans" because these
investments have historically been a safe source of dividends and returns. This year, however, the
Dow Jones Utility Index (DJU) is down 31.76% in part due to the effects of the Enron scandal,
lawsuits related to the California power crisis in 2001, and problems related to unregulated
merchant power. Yet, this downturn in the market may give social investors an opportunity to
invest in utilities that have been careful to maintain their balance sheets while continuing to
address air pollution, global warming, and the supply of renewable and efficient energy.
"Looking forward, we have to assume that a substantial rally may occur at any time,"
said Miller/Howard Investments President
Lowell Miller. "We can't tell when a snap-back will occur, but we're more than in the zone right
now." Miller/Howard's Better Than Bonds/Utilities portfolio is based on research that shows
utilities are, over time, a better total return vehicle than bonds. "Our portfolio holdings are at
attractive levels for private market buyers. The return on capital and return of capital to
an 'owner' is terrific right now. As earnings come in and scandals recede, these stocks will be
found attractive by public market buyers as well."
Utilities have historically bounced
back from down periods exceptionally well, according to Mr. Miller. For example, in 1974, after
two successive down quarters, the Dow Jones Utilities Index (DJU) gained almost 40 percent in the
three subsequent quarters. Similar rebounds occurred in 1987 and in 1994, Mr. Miller noted.
Miller/Howard also sub-advises the only socially responsible utilities mutual fund, the Flex-Funds Total Return Utilities
Fund (ticker: FLRUX). In addition to screening for environmental issues such as greenhouse gas
emissions and violations of the Clean Air Act, the fund screens for militarism, nuclear energy
production, and employee relations.
"Utilities have been traditionally strong in the areas
of diversity and employee relations," Miller/Howard Director of Social Research Irina Branzburg
told SocialFunds.com. Social investors' concerns over utilities primarily have to do with the
environmental impact inherent in this sector.
In June, Innovest Strategic Value Advisors released research that
suggests that environmentally responsible utility companies outperform electric utilities with poor
environmental practices. The study rated the environmental performance of 28 electric utility
"We have abundant research showing that environmental leaders outperform in the
stock market," Innovest Managing Director Frank Dixon told SocialFunds.com. "In this case, the 14
electric companies with above average environmental ratings outperformed the below average group by
nearly 3000 basis points over the past three years. Our top-rated companies were FPL Group (FPL) and Pinnacle West (PNW)." (Ed. note:
FPL and Pinnacle West own and operate nuclear power generating facilities)
Mr. Dixon noted
that consumers' increasing environmental awareness and more stringent government regulation of
utilities, especially from states, might create strategic profit opportunities for social investors
interested in utilities.
"For example, renewable energy and distributed generation
technologies have the potential to gain significant market share in a deregulated energy services
market," said Mr. Dixon. "Large opportunities also exist to help customers improve energy
efficiency, and consumers are becoming increasingly interested in green power options."
Both Innovest and Miller/Howard expressed concern about utilities involved with nuclear power.
"What perplexes us is why most investors are still willing to tolerate the enormous
potential liability, costs, and scientific uncertainties that are unique to nuclear power," said
Miller/Howard Research Analyst Gideon Moor. "Furthermore, we wonder whether the investing
community honestly believes that new nuclear power plants can live up to their historical
reputation as the lowest-cost-provider in an age of accelerating electricity deregulation and
commoditization [sic] accompanied by stricter environmental and public safety regulations and