Three Reasons Why Utility Stocks Are A Bargain Right Now

By: Roger Conrad

US Regulatory Environment Remains Levelheaded

Utilities’ ability to stay strong depends on regulators granting a fair return on investment. The alternative, by contrast, is the surest way to undermine both shareholder returns and long-term system reliability.

The good news is cooperation is alive and well. That even includes states such as Connecticut and Massachusetts, where current attorneys general have taken to election-year bashing of local utilities.

And Vermont has approved the takeover of Central Vermont Public Service (NYSE: CV) by Canada’s Gaz Metro, though after a year of deliberations.

The Obama administration too seems to be rolling back the rhetoric it has ratcheted up for much of 2012. After months of intimating it would reject the merger of Duke Energy (NYSE: DUK) and Progress Energy (NYSE: PGN), the Federal Energy Regulatory Commission (FERC) has now approved the deal.

FERC approval of Duke-Progress with only limited conditions is potentially a good sign for future power sector mergers.

Meanwhile, the replacement of Gregory Jaczko with Alison MacFarlane as head of the Nuclear Regulatory Commission promises less acrimonious and more science-based policy, opening the door to more licenses to build new nuclear plants as well as relicensing currently operating facilities.

There remain thorny issues to be resolved, such as the Federal Communications Commission’s still-to-be-announced ruling on Verizon Communications’ (NYSE: VZ) purchase of unused wireless spectrum from cable companies.

TransCanada Corp’s (TSX: TRP, NYSE: TRP) Keystone XL pipeline linking Canadian tar sands output with US Gulf Coast refineries likely won’t be ruled on until after the election.

And New York likely won’t decide until next year on Fortis Inc’s (TSX: FTS, OTC: FRTSF) bid for CH Energy Group (NYSE: CHG).

Last month’s actions are a hopeful sign that even in this election year, most regulatory decisions will follow cooperation rather than confrontation. And that’s a good reason to stay bullish on utilities’ long-term invest-to-grow story.

Robust Credit Conditions for US Utilities

In early 2003 more than two-dozen electric companies were either in bankruptcy or on the brink of it. That’s when a new generation of management began systematically cutting debt and operating risk while mending relations with regulators.

Nine years later the industry is in its best financial shape in decades, with low payout ratios, recession-resistant revenue and minimal near-term refinancing needs.

And that’s despite a lingering recession in many parts of the country, environmental challenges and volatile credit markets.

Now, finally, credit raters are starting to recognize the improvement, lifting both ratings and outlooks. That’s allowed companies to further improve balance sheets by issuing very long-term debt at extremely low interest rates.

Last month, for example, NextEra Energy Inc (NYSE: NEE) issued 60-year bonds rated BBB by Fitch at a cou­pon rate of only 5.625 percent. NiSource (NYSE: NI), rated BBB- by S&P, sold 30.5-year paper at 5.25 per­cent, while BBB-rated PPL Corp (NYSE: PPL) sold 10-year notes at 4.2 percent, and Wisconsin Energy Corp (NYSE: WEC), rated A-, sold 29-year notes at 4.5 percent.

That’s a far cry from Europe, where similarly rated companies are now paying 7 percent-plus to issue five-year debt. It’s a very clear sign that the Continent’s credit woes are not yet spreading to these shores.

Although US bond bargains are few and far between, those low borrowing rates couldn’t be more bullish for solid utilities stocks.

Insider Action Suggests Confidence

Executives and other “insiders” sell stock they receive as compensation for many reasons. They buy on the open market for only one: belief their company’s stock is undervalued and headed higher.

Of the 43 stocks in my investment advisory’s portfolio, only three showed a decrease in ownership, all following sizeable run-ups in share price.

Frontier Communications’ (NYSE: FTR) insider ownership has risen 41.6 percent over six months. And several Wall Street firms have seconded that vote of confidence with ratings upgrades in recent weeks.

I’m more impressed, however, by the continuing wave of insider buying of fellow wireline telecom Windstream Corp (NYSE: WIN). Insiders have been buying relentlessly since the stock’s early May plunge under $10, and this activity has been accompanied by analyst upgrades. For more safe, high-yield stock picks, check out my High-Dividend Stocks report.