STOCKWATCH: Choppy waters

Over the last three months, utility stocks have generally been lacklustre, especially on the electricity side.

Amid expectations of the FTSE-100 Index breaking through its record close of 6,930 in December 1999, stock markets in recent days have been heavily impacted by developments in Ukraine, and especially the financial implications of the de facto Russian occupation of the Crimean peninsula.

Whilst such events have little direct relevance to the future earnings of most UK/EU utility stocks, save perhaps in edging up gas input costs, it does create real uncertainty – a feature disliked by investors.

At such times, utilities – with their safe earnings and dividend flow – are expected to outperform other more cyclical stocks.

This trend has applied to UK water stocks, which – without actually welcoming Ofwat’s indicative 3.85% weighted average cost of capital (WACC) figure – have rallied: the figure could have been worse.

Indeed, since early December, the three quoted water stocks have seen their shares rise by c15%, with United Utilities being the stand-out performer.

Not surprisingly given its ‘safe haven’ status, shares in National Grid – with its UK prices fixed until March 2021 – are up by c12% since early December.

And, after a weak period, SSE’s shares – with unknowns on many fronts, ranging from distribution reviews to the Scottish referendum – have steadied of late.

But Centrica, whose 2013 full-year results met expectations, remains ‘under the cosh’ assailed by politicians of various hues and a likely reference of its UK gas business to the regulatory authorities.

Shares in Drax Group rose sharply in early December as the generous subsidy arrangements for its biomass conversion were confirmed; recently, though, they have been becalmed.

Overseas, several major utilities have recently reported, including three of the ‘big six’.

EdF’s figures were encouraging with impressive nuclear output levels, especially in the UK. Its shares, up by almost 10% over the last three months, are sustaining last year’s pronounced rally.

RWE continues to struggle, both in Germany and elsewhere. Its 2013 figures were poor, even before almost €5 billion of impairment provisions.

E.On, too, has faced various setbacks, with the shares marking time in recent months.

And Iberdrola, in addition to mixed 2013 results which inevitably suffered from Spain’s parlous economic situation, recently announced its widely-awaited strategy update: the market’s response was muted.

Shares in Italy’s ENEL have bounced following reasonable 2013 results, although they were flattered by capital gains: ENEL’s outlook for this year was more encouraging.

France’s other major energy player, GdF Suez, has seen a recovery in its beleaguered share price following its results – net debt fell appreciably.

However, provisions of almost €15 billion – of which €9.1 billion was for tangible assets – underline the tremendous challenges facing electricity generators.

Looking forward, the next three months are likely to be equally eventful for utility stocks.       

Nigel Hawkins (nigelhawkins1010@aol.com) is a Director of Nigel Hawkins Associates which undertakes investment and policy research