Still think utilities are bond substitutes? Check out my table comparing changes in the benchmark 10-year Treasury note yield with 21 years of annual returns on the Dow Jones Utility Average and the S&P 500 Telecom Service Index.
Here are the chief takeaways. Both the Telecom and Utility indexes rallied in 14 of those years and lost ground in four. Three times, one gained while the other lost.
In the 14 years both indexes rallied, interest rates finished lower than they began eight times. Six times, however, they rose while utilities and telecoms rallied. Ironically, the most dramatic case is year-to-date 2013.
The four times both stock indexes lost ground, interest rates finished the year higher only once, in 1994. That was also the year when the utility and telecom industries were threatened by prospective deregulation. The benign resolution of deregulation issues was the real reason for the rally that followed in 1995. And in 2008, 2002 and 2001, utilities and telecoms dropped even as interest rates fell sharply.
That’s not to say interest rates had no effect. But utilities and telecoms have clearly not behaved like bond substitutes the past 20-plus years. Earnings are the key to dividend growth and returns. And even higher borrowing costs are only significant in how they impact business profitability.
That’s why the pullback this spring and summer was a buying opportunity, rather than a time to head for the hills. ... And it’s why the next rate scare-inspired selloff will also be a buying opportunity.
Roger Conrad, Conrad’s Utility Investor, www.conradsutilityinvestor.com, 888-960-2759, November 1, 2013
