Utilities Industry Loses Its Juice Over Carbon Plan, Dividend Cuts

Sector Is Second-Worst S&P Performer, Behind Financials

By DAVID GAFFEN

One of the market's traditionally defensive sectors has recently been anything but.
In the past several weeks, as the market has hit 12-year lows, each of the 10 industries in the Standard & Poor's 500-stock index has lost ground. In March, after financials, the worst performer has been the utilities sector, down 9%.
Strategists point to concerns about the Obama administration's efforts to limit carbon emissions through a cap-and-trade program that would tax offenders, including many utility companies, along with concerns about higher financing costs and reduced demand.
Recent dividend cuts, along with expectations that favorable tax treatment for dividends will lapse in 2010, also are weighing on the sector. Ameren Corp. and Great Plains Energy Inc. reduced their quarterly payouts in February by 39% and 50%, respectively, calling into question the view that utilities were a safe source of dividends.
Utilities were hardly standouts in 2008; the sector fell nearly 32%, but that was third best among the 10 industry sectors and short of the S&P's 39% decline. The stocks weren't particularly weak in the early part of the year, but as expectations for climate-control legislation have risen, so too has investor concern, because of the potential cost for utility companies.
In commentary last week, Sanford C. Bernstein & Co. analyst Hugh Wynne noted that climate-control legislation is high on the list of priorities of Democrats in the House and Senate. He said a bill that was moving through Congress last year may be resuscitated, one that he said was "guided in large part by the need to establish support for climate change legislation among coal state Democrats and affected industries."
These worries have caused shares to decline, making their valuations more attractive, said Dan Eggers, analyst at Credit Suisse Group, who upgraded shares of utilities Duke Energy Corp. and Consolidated Edison Inc. on Tuesday.
Mr. Eggers said utilities trade at a price-to-earnings ratio of 9.4, lower than the sector's long-term average. He added that dividend yields are at 19-year highs -- more than yields on bonds issued by utility companies.
As for those worried about the expiration of the 2003 tax cuts that lowered the rate on dividends, Mr. Eggers is less concerned.
He said the lower taxes boosted price-to-earning multiples in the sector, but amid the selloff "that lift has been stripped out of the stocks at this point."
Write to David Gaffen at David.Gaffen@wsj.com