Risk avoidance drives utility stock performance.
Jeffrey W. Miller (jmiller@navigant-consulting.com) is a director with Navigant Consulting’s energy practice. Michael Rutkowski (mrutkowski@navigantconsulting.com) is managing director, Jason K. D’Souza, is a managing consultant and Brian West is a senior consultant with Navigant’s energy practice.
Utility stocks historically have been a safe haven, a stable, long-term investment for widows and orphans. However, with banks collapsing and the economy falling into a recession, utility stocks as a whole recently have performed poorly, with our portfolio of 75 companies1 losing $200 billion in market value in 2008.
While the Dow Jones Utility Index slightly outperformed the Dow Jones Industrial Average, (by 4 percent, -30 percent vs. -34 percent), total shareholder returns (TSRs) were abysmal. Only eight companies in our portfolio produced positive TSRs. Given the impairments in the markets and the significant tightening of credit and cash availability—even for utilities with strong credit ratings—the overriding factor driving individual company performance was perceived risk (i.e., the amount of unregulated, relatively risky, cash-intensive businesses vs. regulated electric and gas utility businesses).