Utilities Sector Review
Not all businesses are created equal. Businesses in some industries and sectors have exhibited more consistent earnings power because of the intrinsic pricing power and entry barrier (moat) in these sectors. Previously, we have analyzed consumer staples and health care sectors, in addition to S&P 500 companies as a business:
- April 1, 2019: S&P 500 As A Business
- March 25, 2019: Health Care Sector Review
- March 11, 2019: Consumer Staples Sector Review
We have shown that companies in consumer staples and health care sectors have more stable business that is translated to their steady stock returns. In this newsletter, we will continue to look at another sector, utilities, which has similar characteristics.
Utility companies include water, gas, electric alternative energy and other infrastructure firms. Their industries are usually regulated: for example, an electricity company cannot arbitrarily raise its price. As these companies are usually involved with big up front infrastructure that are for our daily life, the entry barrier is very high (imagine how hard it is to start a new gas utility company from scratch). Since these businesses are more or less like regular toll collection, they enjoy more steady income and thus pay higher dividends to their shareholders on average. Furthermore, they can pass on inflation cost (such as commodity cost) to consumers, thus they also offer inflation protection. Utility stocks are perceived to be between average/growth stocks and bonds.
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