Adopting digital capabilities to transform operations and processes holds immense promise for utilities. Indeed, it’s the best path to growth.
Sub-Primed and Ready
Will the turmoil on Wall Street spur a massive flight to utilities?
it was a few years ago. He refutes any suggestion that the negative correlation might mean that the market or investors are not factoring in credit strength to their valuations.
“I just think that we are now at a point in the industry where a lot of those concerns have moved from being the number-one priority to being something that is monitored, as most utilities have addressed the issue of credit risk,” he says.
Given the nature of capital investment in the utilities industry, a longer-term horizon would bring this metric to the fore in a more significant way, he says.
“In a non-capital-intensive industry, free cash flows absolutely is a driver. I think it would be interesting to do the analysis over six and 10 years. I think we’d find more interesting correlations.”
As far as dividends, if you look at the correlation to return to shareholders, as share price decreases the dividend yield increases.
“So, that would explain the negative correlation,” says our analyst. “The other part of the negative correlation is that I would make the assumption [that] the street is seeing sufficient opportunities for strong capital investment in the utilities industry and therefore not rewarding companies that have an above-average dividend yield.”
Understanding why the market is neutral or indifferent to free cash flows may provide insights as to how investors view the industry. But more important, the industry must understand how the change in market conditions, such as the tightening of credit, might or might not affect the billion-dollar infrastructure projects that will be in various stages of financing in the future.
Standard and Poor’s analysts told me that the industry might even benefit from the sub-prime meltdown, because utilities would have more access to capital as more lenders compete for their high credit-quality business.
A Remedy for Risk
Many of these questions are more than academic. Some economists believe the economy may be headed into a possible recession due to the financial turmoil caused by sub-prime loan defaults in the mortgage markets.
That belief notwithstanding, Treasury Secretary Henry Paulson, in his first public comments since the sharp downturn in financial markets in late August, said the turmoil would “extract a penalty on the growth rate” of the U.S. economy, but expressed confidence that “the economy and the markets are strong enough to absorb the losses” without provoking a U.S. recession.
At press time, however, the situation seemed to be getting worse. On Aug. 15, U.S. stocks fell so low as to wipe out the year’s gains for the benchmark S&P 500. On that day, the Dow Jones industrial average lost 167.45 points, or 1.29 percent, to end at 12,861.47—or 8.4 percent below its record close. This marked the Dow’s first close below 13,000 since April 24, and may be the beginning of a wholesale shift in stock and bond portfolios, toward utilities.