Utilities Economic Sector

Chance Owen and Jesse Crawford-Lang

Utility CompaniesCompanies engaged in producing/delivering electric power, natural gas, water and other utility services (steam, cooled air, etc.).

Industry up 21.55% on the year

What They Are Known ForReliable income, good paying dividends and correlation to the market. • Least correlated sector (.56) in 2015

• 4 out of 9 sectors have a correlation of .93-.94 with S&P 500

Since utilities encompass features of both equity and fixed income securities, its correlation with other stocks is usually lower.

Dividend Paying StocksOutperform Market: Averaged 9.3% 1972-2013 (41 yrs)Generally, less correlated with stocks in their own asset class.

- Which, in Modern Portfolio Theory, leads to dividend stocks being thought of as their own asset class at times.

Not a substitute for bonds! Treat like small-cap stocks

MPT vs. DGI MPT turns away from individual stock picking. MPT focuses on achieving total return.

• Retirement is a target, like crossing a finish line (4% rule)

DGI generally involves picking individual stocks to construct a portfolio. Since the market is not involved in the declaration or payment of dividends, they utilize a DGI strategy to get an uninterrupted income stream.

• DGI instead sees retirement as an inflection point in how dividends are used.

Both MPT and DGI attempt to minimize the impact of market gyrations on results, but they do so in very different ways.

Macropolitical View & Implementation1. Dividends + Capital Appreciation2. Water infrastructure here is in a crisis, exploit it.

- Flint MI, Okeechobee FL, TX and more. -American Water Association (2010): $1 Trillion estimated over

next 25 years, house hold bills will increase, and it needs 2.8x more investment than the next utility, electricity. 3. Although the need for infrastructure change is bigger than politics, you might try to narrow down when the changes will come in effect. - Trump: 500B in infra, never mentioned water, and plan relies on infrastructure bonds which would raise deficit – not likely.

- Hillary: 275B in infra, mentions water all over website numerous times and has mentioned in interviews as well.

America: Water 84% govt. vs. 16% private

Speculation: ProsCurrently seeing an Improvement in housing:

- An improving housing market could lead to higher electricity & water demand in developing areas

Attractive dividends:

- Dividend-paying stocks remain attractive compared to relatively low yields on conservative fixed- income products. Market correction after election cycle

- Historically the first two years after a new president is elected market returns drop on average 3-6%

- Should the Market see a major correction after the election “Defensive” utilities might be your best bet.

Speculation: ConsThe utilities sector could be hurt by Federal Reserve policy, when interest rates rise

- Increased demand for "green" initiatives could increase regulatory costs High fixed costs: Capacity growth has been rising, which has been a sign of underperformance for the sector in the past.

High debt ratios problematic when interest rates rise

IE: Vote no on 1 in FL

Leading BetsWater had the lowest market cap and biggest need for change• AWK (vs. WTR, STW)• 47 states; 27x earnings• 55,400 new customers from acquisitions this past year• Cash flow up 24%, debt spending up 4%• Down to 71 from year high of 85; back at 200 day

moving average. • Dipped below 200 day average 5 times since 2010 (price 21$),

never more than two months (twice) and usually coming back soaring higher – hence the

2010-14

2014-Present

VS. DJI & S&P 500

Utilities Economic Sector

Chance Owen and Jesse Crawford-Lang