The World's Best Utilities
by Roger Conrad, editor
Utility Forecaster
America's
three-year bear market, growing trade deficit, busted federal
budget, sluggish economy and crashing dollar are a few good reasons
to keep capital in foreign-based investments. The ideal vehicles
are high-quality utility stocks.
Our "Overseas
Shopping List" features seven, four of which are already
Utility Forecaster portfolio selections. Like all first-tier
utilities, these companies have very strong finances, secure
revenue streams from regulated franchises, solid relationships
with the governments overseeing their operations and proven growth
potential in their industries' most promising areas. All would
make worthy portfolio additions.
Each stock is cheap
and can benefit from the appreciation of its home currency against
the U.S. dollar which, during the past year, has become an established
trend. All are buys for conservative and aggressive investors
alike in diversified portfolios.
Britain's Best
Given
the pasting the London stock market has taken since the 1990s,
it may seem a strange place to shop for utilities. But the three
companies on our list, British Telecom, National Grid and
Vodafone Group are all extremely powerful, exceptionally
cheap and wired for strong steady growth.
In May 1998, I sold
British Telecom (NYSE BTY $28, Yld 2.9%; www.bt.com) from
the Growth Portfolio at a price near $110. England's leading
carrier trades for barely a quarter of that now, but it's ironically
a far stronger company and safer investment.
BT invested heavily
in global business communications and wireless phones in the
late '90s, with disappointing results. By 2001 it was bleeding
red ink, drowning in debt and facing a possible junk credit rating.
That's when CEO Ben Verwaayen took the reins from what had been
a string of faceless and largely impotent leaders. He slashed
costs and debt, refocusing the company on its core wireline network
and unloading everything else, including high-priced European
wireless licenses.
Because British regulators
are notoriously stingy granting returns on basic service, Verwaayen
concentrated on boosting BT's broadband capabilities. Despite
a weak local economy, the company announced last month that its
broadband service is adding 25,000 customers a week. Meanwhile,
in the past year it's cut operating expenses 6 percent and reduced
customer dissatisfaction.
Total debt will fall
to barely 10 billion pounds after the company completes the sale
of a minority stake in a French telecom, barely half 2001 levels.
With a low P/E and solid growth protected, BT is again
a good buy up to 30 for conservative investors.
Core Holding National
Grid Transco (NYSE NGG $32.71, Yld 3.6%; www.nationalgrid.com)
is also going back to basics. After merging with Lattice
Group last year, the company controls Britain's power
grid as well as its principal natural gas distribution infrastructure.
It runs these for a fee, leaving competition and commodity price
risk to others. Grid is doing the same thing in New England,
acquiring three power transmission and distribution utilities
and prowling for more targets.
Lack of operating risk
and steady sales add up to powerful cash flows. The company is
currently putting these to work cutting debt and buying back
its own shares. And it's making additional investments in fee-based
infrastructure, such as a proposal to build the U.K.'s first
liquefied natural gas terminal to meet what's expected to be
surging demand for gas imports in the coming decade.
With its financial
power, unassailable business position and generally good regulatory
relations, Grid looks set for steady annual total returns of
10 percent 6.5 percent growth plus dividends even if the environment
remains sluggish. Buy National Grid Transco up to 38.
Aggressive Holding
Vodafone Group (NYSE VOD $18.78, Yld 1.5%; www.vodafone.com)
has faced legions of skeptics since CEO Chris Gent launched a
global acquisitions spree of established phone companies, and
began shedding wireline networks to focus exclusively on cellular.
Yet three years into an industry depression, it's still adding
steadily to its 112.3 million worldwide customer base and boosting
revenue with new services, while holding debt at the lowest level
for any global telecom.
And there's more to
come. Vodafone has established itself as the leader in several
key markets, including the U.S. through its 40 percent ownership
of Verizon Wireless. ARPU, or adjusted revenue per unit
the most widely watched measure of wireless profitability continues
to rise as the company converts more customers to higher-cost
products such as data services.
Competition means profits
will likely take a backseat to building more market share in
the coming year. But for aggressive investors with patience,
Vodafone is doing what it must for a run back to bull-market
highs and beyond. Those who don't own Vodafone can buy
up to 20.
Powering China
China's
robust economy and stock market stand in marked contrast to the
rest of the world in 2003. And with the country passing Japan
in exports to the U.S. last year, it should just keep getting
stronger, even if the official growth rate of 8 percent proves
to be vastly inflated. That spells explosive demand for electricity
and the Energy Information Agency projects a tripling of production
capacity by 2020.
CLP Holdings (OTC
CLPHY $4.10, Yld 4.8%; www.clpgroup.com) is my favorite China
power play for several reasons. First, it runs Hong Kong's largest
electric monopoly, with a guaranteed franchise through 2008 and
almost certainly beyond. Regulators have set a guaranteed return
of 13.5 to 15 percent on all equity investments, locking in annual
cash flow growth of about 10 percent as utility capital spending
continues to wind down.
As pointed out in an
earlier issue of the Utility Forecaster, CLP has used
its cash hoard to hold debt to just 16 percent of equity, boost
dividends and expand its reach abroad, with a major focus on
power plant projects in mainland China, most of which are held
in a 60 40 joint venture with ExxonMobil. Management currently
plans several ventures, including the country's biggest wind
plant.
If successful, the
China ventures could easily double CLP's overall growth in the
coming years. But if not, the steady base and Fort Knox-like
finances will keep it pumping out steady returns. CLP is
still a great aggressive total return play up to 5.
New World Winners
With
Brazil weak, Argentina threatening to nationalize utilities land
Columbia and Venezuela in civil war, utility pickings in Latin
America are best left for short-term speculators. But it's a
great time for shopping in the Hemisphere's former British possessions.
Canada's BCE Inc.
(NYSE BCE $18.81, Yld 4.1%; www.bce.ca) was once best known
as the parent of Nortel Networks, which it spun off with
great fanfare in the 1990s. But as its former unit has faded
from view, BCE has built a dominant presence in Canada for everything
from basic local and long distance service to wireless, broadband
and entertainment. The company boasts remarkably steady sales
and market share, growing earnings and cash flows, and a strong
and improving balance sheet.
In a sluggish 2002
economy, BCE posted respectable profit and cash flow growth of
4 percent and 5.2 percent, respectively. Productivity enhancements
should boost that to about 8 percent in the coming years. That
means investors can expect total returns in the upper single
digits. Buy BCE up to 20.
Reliant on the rain
for much of their drinking water, Caribbean islanders are proving
eager customers for Consolidated Water's (Nasdaq CWCO
$14.66, Yld 2.9%) reverse osmosis business. Since last summer,
it expanded operations beyond the Cayman Islands to the Bahamas,
Barbados, Belize and the British Virgin Islands. And the company
continues to add new contracts with business and governments
throughout the region.
One of my concerns
when I initially recommended the company was the potential impact
of a weak economy or terrorist threats on tourism, hence its
sales. The answer thus far is that business is resilient and
debt is low enough to absorb a slump and steady earnings continue
to support robust dividend growth. Consolidated Water is
a sound buy up to 15.
In early 2000, then
Aggressive Holding TransCanada Pipelines (NYSE TRP $14.63,
Yld 4.9%; www.transcanada.com) was struggling to cut debt and
dispose of myriad unprofitable businesses acquired in an ill-conceived
merger. Management refocused on the core pipeline business, selling
$2.7 billion in assets and slashing the dividend 28 percent.
Unfortunately, I sold early, but the plan has worked, with earnings
rising 8.3 percent in 2002, financing an 8 percent boost in the
dividend. And the stock has doubled off its lows.
Today, the company
is capable of robust expansion in both gas transmission and power
generation. The company recently acquired a control interest
in Northern Border Pipelines, a key link between its western
Canada network and the gas-hungry Midwest. It also purchased
31.6 percent of Bruce Power from struggling British
Energy, securing a foothold in nuclear and wind energy. Importantly,
the purchase boosts cash flows but entails no liability for spent
nuclear fuel and decommissioning.
Acquisitions have caused
S&P to place the company's A- rating on credit watch. But
with conservative financing and debt reduction, it should remain
comfortably investment grade. On track for steady growth in profits
and dividends, TransCanada is a buy up to 15.
Editor's Note: Roger
Conrad is editor of Utility Forecaster, 1750 Old Meadow
Rd., Ste. 301, McLean, VA 22102, 1 year, 12 issues, $129. Offering
the nation's most in-depth coverage of energy, communications,
water, and foreign-based utilities since 1989, the Utility
Forecaster has won awards for Best Financial Advisory from
the Newsletter Publishers Foundation four out of the past five
years.
