econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 28 July 2016

The New Utility Castles

by Richard Stavros

Investing Daily Article of the Week

The notion that demographics is destiny doesn't just apply to geopolitics, it also has bearing on the utility sector.

Although we usually employ fundamental analysis when searching for the next great utility stock, we also use a top-down approach to identify promising names, while avoiding possible dogs.

While regulated electric utilities are among the safest companies in which to invest, they still ultimately depend on demand for the electricity they generate.

That's why we periodically examine the key factors that drive this demand: demographics and economics.

In the past, we've approached demographics from different angles. For instance, a few weeks ago, we wrote about how utilities whose service territories have high concentrations of Millennials and Gen Xers could be better positioned for long-term growth since these groups are willing to pay more for green energy.

Interestingly, shortly after we published that article, my colleague Ari Charney happened to receive a promotion in the mail from Dominion Resources (NYSE: D) that touts its GreenPower program, which encourages customers to pay an average of $13 more per month to power their homes with 100% renewable energy. Naturally, those who sign up for this program receive a free tote bag.

Anyway, that's a somewhat narrow mode of demographic analysis, and it remains to be seen whether Millennials and Gen Xers are truly willing to pay more for green energy or just enjoy the easy virtue of saying they would.

Our usual approach to demographics is much broader. As statistics junkies, we look at state-by-state population growth, as well as each state's gross domestic product (GDP) growth, and variations in electricity prices.

One utility that continues to be a demographic standout is NextEra Energy (NYSE: NEE), whose Florida service territory benefits from above-average economic growth and the influx of retiring baby boomers.

Recent figures from the U.S. Bureau of Economic Analysis showed that Florida's economy continues to grow at a faster pace than the average state, with GDP rising 2.7% during the fourth quarter of 2015.

Utah is also enjoying strong growth, with GDP increasing by 2.8%. This bodes well for Dominion's acquisition of Utah-based gas utility Questar (NYSE: STR).

However, some states are not doing as well as they were when we last observed state-by-state quarterly and annual GDP figures, particularly Texas, Missouri and Kansas.

Texas Tanks on Oil Price Collapse

In previous years, Texas saw robust economic growth thanks to the strength of the energy market and the new workers it attracted from other states.

But the oil crash has clearly taken a toll, as the state's economic growth has more than halved, to 1.4%.

However, if the oil industry recovers over the next couple years, this could prove to be a short-term trend and, therefore, a buying opportunity for Texas-based utilities. In fact, five of the nation's eleven fastest-growing cities are in Texas, according to the Census Bureau.

Given future growth dynamics, companies such as CenterPoint Energy (NYSE: CNP) could eventually surpass their peers, as long as newly minted Texans don't leave the state during the downturn to seek jobs elsewhere.

Meanwhile, Missouri saw GDP growth decline to 1.8%, while Kansas suffered an outright contraction, as GDP dropped by 0.7%. Perhaps the proposed Westar (NYSE: WR) and Great Plains Energy (NYSE: GXP) merger was more about survival than growth.

California Clouds, but the Northwest Is Cheap

On the West Coast, we have a darker picture. California's GDP has declined substantially since we last reviewed the numbers, though it's still above average, at 2.7% growth.

Although its rate of population growth is steady, at around 1%, we're concerned that the Golden State's population growth will continue to slow. According to the Census Bureau, California's population isn't likely to grow much faster than the nation as a whole for the next half-century.

This would be a departure from its high rate of population growth for many decades. And with the highest electricity rates in the nation, there's concern that California utilities such as PG&E (NYSE: PCG) won't be able to find growth to support their ambitious renewable-energy projects.

Even worse, California's neighbors, such as Washington State, Oregon and Nevada have seen significant drops in GDP - all three are either well below average or barely growing.

This has implications for utilities such as Avista Corp. (NYSE: AVA), Portland General Electric (NYSE: POR), and Nevada utilities. At the same time, they do offer lower retail electricity prices than their California neighbors, which could attract businesses seeking cheaper power options.

One wrinkle in this analysis is that GDP growth may no longer have the strong correlation with electricity demand that it once had, as rising efficiency erodes the link between the two.

But for now, we believe this analysis is still a useful way to augment fundamental stock selection in our never-ending search for the new utility castles.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Investing Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Investing


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Joan Robinson’s Critique of Marginal Utility Theory
The Truth About Trade Agreements - and Why We Need Them
News Blog
How To Stop Using Filler Words Like Um And Uh
02 December 2016: ECRI's WLI Growth Index Improvement Continues
Preliminary December 2016 Michigan Consumer Sentiment Highest Since Early 2015
October 2016 Wholesale Sales Improved
Rail Week Ending 03 December 2016: Finally A Positive Month
November 2016 CBO Monthly Budget Review: Total Receipts Up by 1 Percent in the First Two Months of Fiscal Year 2017
Infographic Of The Day: Copyright - Illegal Download
Early Headlines: Asia Stocks Mixed, Oil Steady, Bank Mafia, Trump To Remain TV Producer, US Life Expectancy Down, India Stocks Suffering, Park Impeached, China Struggles To Support Yuan And More
Heavy Metal And Hard Rock Albums That Went Certified Diamond Status
Down The Drain: Wastewater With The Most Cocaine
Apple's App Store Set For 5 Million Apps By 2020
How Can The UK Government Meet Its Legal Air Pollution Targets?
Most Gun Deaths In The United States Have A Tragic Motive
Investing Blog
Are Your Trade Entries Patient Enough?
Investing.com Technical Summary 08 December 2016
Opinion Blog
Looking At Everything: Trump's $1 Trillion Infrastructure Plan
The Global Financial Mess Is Due To Political Failure
Precious Metals Blog
Silver Prices Rebounded Today: Where They Are Headed
Live Markets
09Dec2016 Market Update: New Highs, New Correction Concerns Loom, Short-term Indicators Remain Bullish
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government



Crowdfunding ....






























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved