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Why Utilities Are No Longer a Refuge for Safe Investors

By Andrew Gordon

About a month ago, I told subscribers to my INCOME service to sell the Virginia-based utility company Dominion Resources. I got them out with a double-digit profit.

Of all the utilities in the S&P 500, Dominion had the best earnings growth (38.5 percent) last quarter. So why did I tell my readers to get rid of the stock? When I recommended it in mid-2005, electricity consumption was still increasing and regulated rates were providing cover for rising energy costs. But now, that sector is heading in the wrong direction.

Hey, utilities have advantages - like fixed prices, monopoly-like markets, and a consistent revenue stream. But that revenue stream has sprung a few leaks. Listen to CEO Lewis Hay of Florida Power & Light (FPL)...

"A lot of people think demand for electricity is inelastic. It's not. Our customers are cutting back, and they're not paying their bills, either."

The recession has finally caught up to the utilities. As a result, utilities are husbanding their cash along with all the other companies. Georgia Power is cutting back on spending. And in the strongest sign yet that the utility sector is no refuge for investors, two utilities cut their dividends last month: Ameren and Constellation Energy.

Investors made a lot of money shorting banks. I'm not ready to put utilities in the same camp as banking, but the weaker companies in the utility sector definitely present shorting opportunities.

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