April 20, 2011
Boring, Stable Utility Companies Command Modest Premiums
The New York Times Dealbook notes that the global power company AES is acquiring DPL (energy-related law and business are filled with acronyms). DPL is the parent company of Dayton Power & Light. DPL will be purchased at an 8.7% premium ($30 per share) in the $3.5 billion cash deal, which also included AES taking on $1.2 billion in DPL debt. Similarly, Duke Energy paid a mere 6.4% premium for Progress Energy in a $13.7 billion deal earlier this year.
Power companies have long been known as solid, stable investments, but not typically as ones that will lead to significant and exponential returns. There have been exceptions, with Enron as the most notable, and we all know how that turned out. But generally, power companies are known as stable investments that have limited returns, but also provide (relatively) limited risk.
Given that wise investors should diversify their portfolios, I am always amazed that there seems to be a sense that utilities are not great investments or that they don't provide much upside. Over time, solid, stable growth is typically a very serious asset. Nonetheless, we still see headlines like this: PPL no longer the stable, boring investment it once was. The article explains:
In the second quarter , PPL Corp. lost $7 million. The following quarter, the diverse energy conglomerate earned $20 million - still 90 percent less than a year ago.
That vertigo-inducing ride wouldn't have happened 15 years ago when Pennsylvania Power & Light Co. was a fully regulated utility.
Under that system, in which regulation took the place of the market, utilities were almost guaranteed to recoup expenses. They were permitted to tack on a fixed profit and get it all back in rates paid by customers. For investors, utility stocks were never known for dramatic growth and were often sought for stability and steady income.