After a dismal 1999 utilities are benefiting from more interest so far this year as expectations gro...
After a dismal 1999 utilities are benefiting from more interest so far this year as expectations grow of rate rises in the first half of 2000.
For the 12 months to 10 January the FTSE 350 Electricity index fell by 24% and the FTSE Water index fell by 30%, whereas the main index rose by 10.9%. In the first week of 2000 the electricity index went up by 5% and the water index increased by 3.7% compared with a 3.7% fall in the FTSE 350.
Last year Edinburgh Fund Managers was underweight the sector. Tony Mather, investment manager at Edinburgh, says: "Utilities were shocking performers as the focus on growth companies left defensive companies out of favour. In addition some sectors, such as water, faced tough regulatory reviews. OFWAT imposed price cuts of around 12%."
Traditionally Royal & SunAlliance has been overweight utilities as the sector provides a good source of income. but the group is selective when choosing stocks to hold favouring companies which have successfully diversified.
Michael Felton, UK Equity Income manager at Royal & SunAlliance, says: "Fundamentally you cannot get excited by the sector, stocks do look good value but we favour stocks where there is a catalyst for capital growth either M&A activity or companies which have successfully diversified."
Stocks which Felton holds include National Grid, Scottish Power and United Utilities, all three companies have diversified into telecoms with Energis, THUS and Norweb respectively. Felton also favours Scottish Power due to the subsequent success of its acquisitions. He says: "The company has made tremendous cost savings and managed the companies it has bought into well. Hopefully this success should with the acquisition of US power generator and supplier PacificCorp."
The one water company which Felton favours is SevenTrent again due to diversification with its waste management company Biffa. In the gas sector Felton favours Centrica. He says: "Centrica is a growing service provider which will successfully change the AA from a 'flabby' business."
In March last year the price bottomed out at 103.71p, since then it has steadily increased peaking at 198p in December, the price now stands at
178p. Over the last 12 months the stock offers a yield of 6.74%. During the course of this year Royal & SunAlliance is unlikely to go further overweight utilities. Felton says: "We are reasonably bullish about the market and it would take a wholesale move by the market into utilities for us to increase our weighting. After all it is a sector which is burdened by tough regulatory control."
While the sector does look cheap and offers a good stream of income Edinburgh has not yet decided whether to increase its exposure this part of the market. The P/E ratio on the FTSE Electricity Index is 12.43% offering a yield of 7.05% compared to a P/E on the All Share index of 28.97 times and a yield of 3.27%.
In the case of generators, such as PowerGen and National Power, there are regulatory fears. The regulators are trying to persuade the generators to sign an agreement to put an end to price spiking where the companies put plants off-line to limit supply of electricity and hence raise the price, according to Mather.
On an industry wide basis Edinburgh's decision to increase its weighting will depend on the group's macroeconomic outlook and whether it believes that growth has run its course. Mather says: "The likely scenario is that of increasing the weighting in the short term with the growth story getting back on track in the second half of the year.
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