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One of the sectors that I've been hiding in

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February 04, 2009 – Comments (3)

One of the few sectors that I have still been willing to buy common stock in, rather than the preferred stock and bonds that I have been loading up on, is power companies.  There are a few negatives associated with this sector that I'll get out of the way first.

- Power companies are capital intensive and the credit markets are tight, so a lot of dilution is possible if additional shares have to be issued.

- Power consumption will almost certainly decline during a massive recession like the one that we are currently experiencing.

- Late payments by customers and chargeoffs will certainly increase as the unemployment rate rises.

That's the bad news.  The good news is...

- During bad times power consumption drops much less significantly than consumption of discretionary items (see yesterday's 37% drop in auto sales as an example of what happens to things that don't need to be bought when consumers tighten their belts).

- Many power companies pay attractive, stable yields in the 3% to 4% range with reasonable payout ratios.  You know how I love dividends.

- Here's the growth kicker that I have been looking for with my picks in the sector.  With the Democrats firmly in charge in the government, I fully expect some sort of cap and trade, carbon tax, or renewable energy requirement (possibly a combination thereof) to be passed at some point in the next couple of years.  My two largest positions in the sector, and in my entire portfolio, are power companies that have significant low emission assets.  One is a dominant player in the nuclear sector.  The other focuses more on generating power from wind and solar sources.  If the Dems are successful in eventually passing legislation that restricts carbon emissions, power companies that have the ability to generate power from nuclear or wind sources will have a tremendous advantage.

Democratic Senator Jeff Bingaman, whose committee is responsible for writing energy legislation, is supposedly reviewing a draft of a bill this very week that will require that 20% to 25% of the the country's power comes from renewable energy sources.  Obama has repeatedly mentioned 25% renewable energy mandate, with 10% coming early in the next decade.

The power industry is already likely to receive significant assistance from the Federal government in the form of the proposed stimulus package.  The current proposal contains $13 billion in extended production tax credits, tens of billions of dollars in loan guarantees and grants, and more than $30 billion for a 30% tax credit for domestic manufacturing of renewable energy projects.

It could take time for any carbon restrictions to be implemented, but if they are they offer a tremendous growth opportunity for the power companies that are positioned properly.  Until then, I'll gladly wait and collect 3.5% to 4% in dividends.

Deej

3 Comments – Post Your Own

#1) On February 04, 2009 at 11:42 AM, chk999 (99.97) wrote:

The power utilities are a classic widows and orphans stock. I have mine re-investing the divis into more shares. This will keep growing and growing. OUR PLANS FOR WORLD DOMINATION WILL BE UNLEASHED!

Sorry, let my inner evil overlord out for a moment. But I agree that the utilites have a place in every portfolio.

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#2) On February 04, 2009 at 12:07 PM, motleyanimal (85.99) wrote:

FPL looks like the obvious pick.

http://finance.yahoo.com/news/Statement-by-FPL-Group-bw-14237303.html

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#3) On February 05, 2009 at 7:28 PM, bdash (27.12) wrote:

interesting. im still a little wary of inflation seeing as utilities can't raise their rates at will. Other than that its a strong industry.

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