Are utility companies as safe as some would have you believe?

At the end of the day we all need gas, electric and water to survive in our daily lives as well as the business arena. Utility shares are very often seen as “safe havens” offering sometimes relatively low growth rates but relatively high dividend yields because of their cash flow. At the end of the day, in times of trouble these services will always be required while other luxuries may not. However, are utility companies as safe as some would have you believe?

Long-term steady growth

As we touched on above, the services offered by utility companies will always be in demand in the good times and the not so good times. A mixture of modest price increases and higher usage offer long-term steady growth potential which while not startling is pretty much guaranteed. Many of the smaller utility companies will have a more volatile existence while the large “dinosaurs” continue to plod along. So, on this basis it is not difficult to see why many investors see utility companies as safe havens for the future. Relatively steady cash flow in the form of dividends and even modest long-term growth are music to the ears of many investors.

Are utility companies as safe as some would have you believe?
Do utility companies offer a safe haven in times of trouble?

Government interference

The very fact that from a personal and a business point of view we all depend upon utility services this can put them in an extremely strong position. As a consequence, many governments around the world have specific regulations in place to combat the influence of utility companies and their ability to introduce significant price rises. In theory these regulations should act as a form of protection for both the personal and business sectors but this is not always the case.

When governments around the world decided it was time to sell off their utility companies many just saw the short term cash inflow as opposed to long-term problems. It is difficult to see how some governments can justify selling off these companies to investors and then introducing an array of restrictions on the way in which they can trade. There needs to be a balance between protecting the consumer and business markets and also offering investors a return in the future.

Cash flow is king

As we mentioned above, some utility companies may have limited growth potential but they all tend to have exceptional cash flow. This means that as “cash cows” they are able to pay attractive dividends which are attractive for not only private investors but also pension funds and the like. There is obviously a need to continue investing in their business but on the whole these companies tend to be extremely cash flow positive with more than enough to go around.

We have seen governments try to introduce specific utility taxes, to increase government income, but on the whole utility companies have fought back and defended their corner.

Conclusion

On the whole utility companies offer perhaps limited long-term capital growth but often well above average dividend income. They may underperform in the good times and outperform in the bad times but in the long term there is an opportunity for modest capital growth together with above-average income. So, while government intervention does occasionally prompt volatile share price movements, the utility companies are in many ways able to combat government regulations and fight back.

Once greedy governments around the world decided to cash-in their utility company chips they let the genie out of the bottle!

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