- David Giroux of T. Rowe Price says utilities are far and away the most appealing sector in the stock market.
- He argues that the industry has transcended its reputation as a dull, slow-growing investment.
- Giroux says the falling costs of natural gas and renewable energy are changing the industry, freeing it up for faster earnings growth and stronger returns.
- His optimism for the sector isn’t built around a Green New Deal or government support, as Giroux says economics and innovation alone will keep those trends going.
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Buying a utility is pretty much the stock equivalent of taking out the garbage.
It’s be a good idea and sometimes necessary, but it’s not something you’re excited to do. In fact, you might even do it to take some excitement out of your investment portfolio.
That’s how investors have looked at utilities for decades, and David Giroux — a portfolio manager and the chief investment officer of US equity multi-discipline for the asset manager T. Rowe Price — says they’re failing to see that the sector has changed. And, as a result, an enormous opportunity arisen.
“A client asked me the other day, if I could only own one sector for the next five years, what would I own?” Giroux said at the firm’s 2020 global market outlook event in New York. “I’d own utilities for the next five years, the next 10 years, the next 20 years, and not have any reservations about that call.”
The stock market perception about utilities is that they’re ultra-stable and that their appeal comes from their strong dividend payments. The stocks tend to do best when investors are nervous and they’re seen as bond proxies. Otherwise, they’re unexciting, as their profits are limited by state regulations.
Giroux says fracking for natural gas is transforming all of that. It’s made natural gas dramatically cheaper, so utilities are now paying far less for the fuel they use to generate power. That strengthens their profits and which frees up capital they can invest in expanding their businesses instead.
He adds that renewable fuel sources are behaving the same way and adding to the same dynamic. Giroux thinks they’ll keep doing it for decades, making for an enormous secular benefit.
“Today, low cost renewables are actually cheaper than coal,” he said. “Twenty years down the road, we will have two-thirds to 75% of all the power we consumer in this country will come from renewables [up from 18% today].”
He adds that none of that is linked to a Green New Deal or big regulatory changes. It’s just the result of falling costs, greater investments, and improving technology.
“The utilities are able to grow earnings at much faster rate than they ever have in the past,” he said.
The result is that utilities aren’t slow growers anymore. They now report earnings growth at a similar clip to other S&P 500 stocks — since their earnings are rising faster, and other companies are posting slower growth — and still have the steady dividends and defensive business characteristics that investors already appreciate.
Despite all of that, he says the stocks are trading at only a modest premium compared to their valuations over the past few years, making for a remarkably attractive combination.
Investors interested in Giroux’s recommendations can gain exposure to the sector through ETFs such as the Vanguard Utilities Index Fund ETF and the SPDR Utilities Select Sector Fund.
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