Through the storms of the tech bubble and the Credit Crunch, the utilities have been very good defensive shares. Companies such as SSE (LSE: SSE) (NASDAQOTH: SSEZY.US) and United Utilities have had steady and dependable earnings and have been relatively unaffected by the vagaries of the economic cycle.
Yet I recall at the time of the tech boom and the great bull market at the turn of the century no one had a positive thing to say about the utilities. The investments of the moment were high-growth internet stocks. The utilities were unloved and ignored.
One of the contrarian plays of the last decade
Contrarians of the time would have noted that this was exactly the moment to buy utilities. Anyone who had bought then would have seen incredible returns over the past decade.
Whereas a decade ago energy prices had tumbled, today they are rocketing, and energy company profits with them. But as long-suffering energy customers have seen their electricity and gas bills rocket, people are realising that energy profits can’t keep increasing. So is it now time to sell utilities such as SSE?
There is just too much uncertainty at the moment
My view is that utilities are no longer the screaming buys of a decade ago. And their long-term profit outlook is clouded, now that the regulatory environment is likely to be stricter. Yet, if you examine the fundamentals, SSE is not expensive. It is on a P/E ratio of 16, with a dividend yield of 6%. And its profits are set to increase next year.
However, I feel the sentiment on the utilities is turning negative at the moment, and that their shares may fall further. So my view is nuanced. This is perhaps not the time to buy. If you thinking long-term, the utilities are still worthwhile investments, with steady profitability and juicy dividend yields. But I suspect the growth in profitability is now at an end, and the shares are as likely to fall as rise.
Plus I think there is just too much uncertainty about how the utilities will be regulated in the future. Thus I am being cautious about companies such as SSE. It might just be time to take profits — and I won’t be buying any time soon.
