Utility stocks have outperformed the broader market. Can the industry deliver a show-stopping second act?
Paul Donahue is managing director of Morgan Stanley’s Global Capital Markets Group, focusing on power and utility companies. Contact him at paul.donahue@morganstanley.com.
The utility sector has been one of the best performing sectors in the equity capital markets for more than two years. A low interest-rate environment and investor focus on dividends has helped lift most utility stocks during the last several years. In many respects, this has been a case of the rising tide lifting all ships. But, as another cliche goes, it's only when the tide goes out that you see who is swimming naked.
Lost in the noise surrounding the recent passage of the Energy Policy Act of 2005 and concomitant repeal of the Public Utility Holding Company Act (PUHCA) are signals in the market that may indicate a change in how investors are likely to view the sector going forward. The recent strong performance of growth-oriented utilities in the secondary market, the success of ITC Holdings in the new-issue market, and the preference for companies with proactive shareholder-focused initiatives may each hold clues to investor preferences in the future.