Boring utilities keep lighting it up

Aaron Pressman

Since the stock market hit bottom back in October 2002, the Dow Jones Industrial Average has risen nicely, posting an 82% gain through last Friday. Nothing to sneeze at, for sure, but as Raymond James strategist Jeffrey Saut points out in his weekly column, it pales in comparison to the 226% rise in the Dow Utility Average. And that doesn't include another 20% or so of total return generated by dividends on the index, according to Saut. Thought all those power generators and heavily-regulated electricity companies were being left behind by nimbler, sexier sectors of the market? think again.

One component of the gain was the repeal of merger limits in the Public Utility Holding Company Act, a subject I looked at back in August 2005. Deregulation has also been kind to the utility sector. And demand for electricity has been fed by all manner of high-tech trends, from the increase in computer speed to the growing size of television screens.

Saut and his firm were early to the utility party, jumping on board more than five years ago. He's still bullish, but growing somewhat worried about costly upgrades needed to maintain the power grid as well as the eventual shift away from fossil fuels towards more sustainable sources of energy. The trends favor continued consolidation "to gain the critical mass necessary to accomplish what is needed," he says. His recommendations include Constellation Energy (Symbol: CEG), DPL (DPL), Edison (EIX) and Pepco (POM). For those looking for a mutual fund alternative, Saut suggests Boston's own Eaton Vance Utilities Fund (EVTMX), which has gained almost 16% annually over the past decade. On the infrastructure side of the industry, Saut favors AES Corp. (AES), Cooper Industries (CBE) and Shaw Group.

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