Why are Utilities Dropping So Fast?

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Scooter57
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Why are Utilities Dropping So Fast?

Post by Scooter57 »

Vanguard's Utility ETF, VPU has been dropping like a stone, at times this past week, more than the large cap indexes. Are investors expecting utilities to go bankrupt as a result of the virus?

Traditionally, regulated utilities are a haven for conservative, income-focused investors. I'm not getting why they are performing so poorly. Is this just the result of investors going to cash with everything? Problems with utility company bonds? Something else?

Or is this a buying opportunity for conservative income-focused investors?
Day9
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Re: Why are Utilities Dropping So Fast?

Post by Day9 »

This is another example why dividend paying stocks, even safe utilities, cannot replace the role of bonds in a portfolio. People see the low bond yields of today and sometimes make the mistake of reaching for yield with junk bonds and dividend stocks, or more exotic instruments like MLPs or covered calls. This is a bad strategy. These investments do not replace safe bonds.
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jdilla1107
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Re: Why are Utilities Dropping So Fast?

Post by jdilla1107 »

A slow down in the economy would mean less demand for power/energy.
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vineviz
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Re: Why are Utilities Dropping So Fast?

Post by vineviz »

Scooter57 wrote: Fri Mar 20, 2020 2:12 pm Vanguard's Utility ETF, VPU has been dropping like a stone, at times this past week, more than the large cap indexes. Are investors expecting utilities to go bankrupt as a result of the virus?

Traditionally, regulated utilities are a haven for conservative, income-focused investors. I'm not getting why they are performing so poorly. Is this just the result of investors going to cash with everything? Problems with utility company bonds? Something else?
It's never really possible to explain "why" moves like this happens, certainly not while they are going on. And while it is hard to tune out the day-to-day moves, it's important to remember that it is just noise in the long run.

That said, my personal opinion (about 25% of my US equity exposure is in utilities) is that institutional investors had been using the sector as a "safe haven" and now are using it as a source of liquidity. The sector is highly leveraged, though, so it's certainly possible that investors are anticipating dividend cuts and/or difficulty with future financing.
Scooter57 wrote: Fri Mar 20, 2020 2:12 pm Or is this a buying opportunity for conservative income-focused investors?
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jebmke
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Re: Why are Utilities Dropping So Fast?

Post by jebmke »

Day9 wrote: Fri Mar 20, 2020 2:14 pm This is another example why dividend paying stocks, even safe utilities, cannot replace the role of bonds in a portfolio.
May be the third quarter before we see the full effect but hard not to expect dividend payouts to get crushed later this year.
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willthrill81
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Re: Why are Utilities Dropping So Fast?

Post by willthrill81 »

If I was going to try to invest in 'defensive' stock sectors, it would be consumer staples. Vanguard's fund VCSAX would be a contender. It's dropped about half as much as VTSAX this year. Over the last 5 and 10 years, the two funds have had very similar returns.
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Forester
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Re: Why are Utilities Dropping So Fast?

Post by Forester »

Scooter57 wrote: Fri Mar 20, 2020 2:12 pm Vanguard's Utility ETF, VPU has been dropping like a stone, at times this past week, more than the large cap indexes. Are investors expecting utilities to go bankrupt as a result of the virus?

Traditionally, regulated utilities are a haven for conservative, income-focused investors. I'm not getting why they are performing so poorly. Is this just the result of investors going to cash with everything? Problems with utility company bonds? Something else?

Or is this a buying opportunity for conservative income-focused investors?
Bonds also selling off? I dunno. USMV & SPLV were also dragged down.
ge1
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Re: Why are Utilities Dropping So Fast?

Post by ge1 »

Buying opportunity.
Frank2012
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Re: Why are Utilities Dropping So Fast?

Post by Frank2012 »

I suspect utilities are getting crushed for all of the following reasons:

1. Investors selling safe havens (e.g., bonds, gold, utilities, etc.) in a flight to cash.
2. Fear that recession/depression will cause a slow down in energy demand, so utilities will take a hit to profits,
3. Fear that utilities have taken on too much debt to expand operations.
4. Given the above, fear that utilities will cut dividends.

I'm not sure it's a buying opportunity yet...I honestly don't know. I do think utilities like DUK and NEE are solid companies, but I'm not sure what price to get in.
petulant
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Re: Why are Utilities Dropping So Fast?

Post by petulant »

By the nature of their business, almost all of the expenses of running a utility will continue regardless of the coronavirus or broader economy. Facilities continue to depreciate, bond interest continues to come due, and payroll continues to accrue. Thus, when volumes fall--like kWh of electricity consumed--and if rates are volumetric, the utility's finances will suffer.

Further, utilities will have an increase in bad debts. Bad debts come from providing service and then not collecting the payment. Bad debts will increase because virtually every major utility in the United States has voluntarily, or after a regulatory mandate, put in place a moratorium on disconnections for nonpayment.

Now, I don't know whether the buyers and sellers of utility stocks are incorporating this information explicitly. But it's an explanation for why they could be dropping, and a reminder that utilities are not risk-free companies.
minesweep
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Re: Why are Utilities Dropping So Fast?

Post by minesweep »

The electric utility (PPL Corp) that serves my area is currently yielding 7.69%. The stock price dropped nearly 9% yesterday. They just observed their 100th year anniversary in 2020. Half of their earnings come from regulated distribution companies in Great Britain. The current $19.67 share price is less than $3 above the book value. The stock price is down 47% since January of 2020.

The Financial Times reported back in October of 2019 that the company was in merger talks, so that may have been partly responsible for the run-up in its share price.
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firebirdparts
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Re: Why are Utilities Dropping So Fast?

Post by firebirdparts »

ge1 wrote: Fri Mar 20, 2020 3:58 pm Buying opportunity.
That's what I think. If a government-established monopoly business has volatile pricing, I'd say it's way better than bonds are. Looks like VPU is paying about 4% or so, but oddly enough, it has about the same total return as the overall market. That's amazing. I realize that a lot of people think that volatility is "The risk" but I'm just not seeing it. The risk is not making any money, and it doesn't seem like there's much chance of that.
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rgs92
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Re: Why are Utilities Dropping So Fast?

Post by rgs92 »

I think this is a signal that the entire stock market is now at the opposite of irrational exuberance.
It is in complete risk-off mode.
If this is actionable, who knows? I'm just staying put FWIW. (Maybe reducing my discretionary expenses for a while.)
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Scooter57
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Re: Why are Utilities Dropping So Fast?

Post by Scooter57 »

I would have to assume utilities get bailed out before companies selling nonessentials. I would sure hope so. Even PG&E stock is still around despite their bankruptcy. They aren't going to pay shareholders a dividend for a while but it will come back.
rgs92
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Re: Why are Utilities Dropping So Fast?

Post by rgs92 »

Now that I think about it, if the dividend levels remain high for a while, the regulators may step in to have the companies reduce dividends (and maybe reduce rates as a companion action). So I would be cautious about emphasizing utilities at the expense of other sectors or the broad market.
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Harry Livermore
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Re: Why are Utilities Dropping So Fast?

Post by Harry Livermore »

My water utilities have not gone down far enough into the territory where I was hoping to add to my holdings. I'm thinking "flight to safety"?
WTRG
ARTNA
AWK
Down "only" 11% ish. Just barely touching my previously set "buy" range.
I suppose I will see what the future holds there, but they were at the top of my list to load up on "during a crash". So far, it looks like adding a tiny bit slowly as I see what develops.
Although as I have opined in other threads here, I am now looking at the "dry powder" as possible "Emergency Fund Extension Funds"... since I am unable to work and make income.
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