1

In the last few days I've stumbled upon two-year-old editorials like this one and this one stating "as a regulated utility, publicly traded [PG&E] shareholders benefit from a guaranteed 11.35 percent yearly return on equity" and "that’s slightly higher than the 11 percent that swindler Bernard Madoff pretended to offer... But PG&E investors take in more than that every year".

Are they saying that if I buy PG&E stock, I get 11.35% back in dividends per year? Why isn't everyone buying PG&E? What am I not understanding?

  • 1
    When investing nothing is guaranteed. – Kirill Fuchs Jul 13 '12 at 3:31
  • Dividend yield is ~4%, and the stock is currently lower than it was 5 years ago. – littleadv Jul 13 '12 at 5:36
  • Note that US power-generating companies, especially those who use coal, generally face elevated levels of political risk from the current US administration and EPA policies, mostly those related to global warming, for what that's worth. – user296 Jul 13 '12 at 20:50
1

Typically a private company is hit by demand supply issues and cost of inputs. In effect at times the cost of input may go up, it cannot raise the prices, because this will reduce demand.

However certain public sectors companies, typically in Oil & Engery segements the services are offered by Public sector companies, and the price they charge is governed by Regulatory authorities. In essence the PG&E, the agreement for price to customers would be calculated as cost of inputs to PG&E, Plus Expenses Plus 11.35% Profit. Thus the regulated price itself governs that the company makes atleast 11.35% profit year on year.

Does this mean that the shares are good buy?

Just to give an example, say the price was $100 at face value, So essentially by year end logically you would have made 111.35/-. Assuming the company did not pay dividend ...
Now lets say you began trading this share, there would be quite a few people who would say I am ready to pay $200 and even if I get 11.35 [on 200] it still means I have got ~6% return. Someone may be ready to pay $400, it still gives ~3% ...

So in short the price of the stock would keep changing depending how the market percieves the value that a company would return. If the markets are down or the sentiments are down on energy sectors, the prices would go down.

So investing in PG&E is not a sure shot way of making money. For actual returns over the years see the graph at

http://www.pgecorp.com/investors/financial_reports/annual_report_proxy_statement/ar_html/2011/index.htm#CS

1

No. That return on equity number is a target that the regulators consider when approving price hikes. If PG&E tried to get a 20% RoE, the regulator would deny the request. Utilities are basically compelled to accept price regulation in return for a monopoly on utility business in a geographic area.

There are obviously no guarantees that a utility will make money, but these good utilities are good stable investments that generally speaking will not make you rich, but appreciate nicely over time. Due to deregulation, however, they are a more complex investment than they once were.

Basically, the utility builds and maintains a bunch of physical infrastructure, buys fuel and turns it into electricity. So they have fixed costs, regulated pricing, market-driven costs for fuel, and market-driven demand for electricity.

Also consider that the marginal cost of adding capacity to the electric grid is incredibly high, so uneven demand growth or economic disruption in the utility service area can hurt the firms return on equity (and thus the stock price). Compare the stock performance of HE (the Hawaiian electric utlity) to ED (Consolidated Edison, the NYC utility) to SO (Southern Companies, the utility for much of the South). You can see that the severe impact of the recession on HE really damaged the stock -- location matters.

Buying strategy is key as well -- during bad market conditions, money flows into these stocks (which are considered to be low-risk "defensive" investments) and inflates the price. You don't want to buy utilities at a peak... you need to dollar-cost average a position over a period of years and hold it.

Focus on the high quality utilities or quality local utilities if you understand your local market. Look at Southern Co, Progress Energy, Duke Energy or American Electric Power as high-quality benchmarks to compare with other utilities.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.