In 2000, Berkshire Hathaway (BRK) entered into a new industry when it invested $1.7 billion to acquire MidAmerican Energy (MEC), an electric utility based in Iowa with operations in the United States and the United Kingdom. “Though there are many regulatory constraints in the utility industry, it’s possible that we will make additional commitments in the field. If we do, the amounts involved could be large,” said at the time BRK’s CEO and Omaha-based legendary investor Warren Buffett.
Mostly considered a low risk investment though capital-intensive, the utility sector encompasses stocks from electric, water, gas and power providers. Despite some continuous uncertainty over the cost of infrastructure and raw materials, utility stocks are widely seen as reliable as bonds but more rewarding since they pay a dividend yield of 3.5 percent, clearly above the yield of the S&P 500 at 2.11 percent and the U.S. 10-year Treasury note at 2.7 percent as of December 28, 2018.
Since the market’s recent entry into bear territory, consulting firm Cyceon noticed that the utility sector has shown more resilience so far than most other sectors including health care, financials and industrials.
Indeed, utility companies like Connecticut Water Service (CTWS), Atmos Energy (ATO), Northwest Natural Gas (NWN) are respectively down 4.05 percent, 7.46 percent and 12.86 percent from their historical highs*. In the meantime, industrial company ABM Industries Inc. (ABM), financial company Eaton Vance Corp. (EV) and health care distributor Cardinal Health (CAH) are respectively down 30.92 percent, 40.38 percent and 50.65 percent from their historical highs.
Multi-utilities companies however might be a bit more scattered than their specialized counterparts, for instance MDU Resources (MDU) is 34.20 percent away from its top, contrasting with Vectren Corp. (VVC) which is just 0.18% away. All the companies cited above belong either to the dividend aristocrats category or to the dividend champions category meaning that they are all longstanding companies with stable dividend distribution and growth policy.
* Most of historical highs here have been considered since 2007.
According to the Consumer Price Index (CPI) statistics, inflation in the United States has jumped from near zero in 2015 to 2.5% in 2018, mainly because of strong consumer spending, employment figures, tax reform and trade tensions.
In its latest “viewpoints”, Newport Beach-headquartered fixed-income giant Pacific Investment Management Company (PIMCO) reminds investors that “inflation surprises are not rare” and that “real assets” like commodities, US Treasury Inflation-Protected Securities (TIPS), sovereign Inflation-Linked Bonds (ILBs) and Real Estate Investment Trusts (REITs) offer a resilience-building solution since “correlation between stock and bond markets tend to rise when inflation is elevated”.
Considering that “inflation will be higher than in the recent past” – in the 2.0%-2.5% range in 2019, mitigating the risk requires investors to reconsider the traditional 60/40 stock/bond portfolio which would likely lose 1.1% if inflation surprises by 1%, writes PIMCO.
In order to meet the challenge, you may invest in inflation-hedging solutions (see below) for late-cycle investing “while also enhancing diversification and boosting return potential.”
For some time on the ground and more and more frequently in words, the main military concern of the United States as seen by its government and its Generals focuses on China.
Indeed, if the immediate threat from a cybernetic and political viewpoint originates from Russia, the real long-term threat against US interests would mainly originate from China, the sole country able to reach world leadership over the next decades.
US President Donald Trump has repeatedly demanded more military funding from his European NATO allies considering that “the United States needs a very strong European pillar (because) in 15 years it is a very strong likelihood that we will be at war with China,” said US General Ben Hodges at the Warsaw Security Forum.
Now retired and a former commander of the US Army in Europe, Hodges believes that the United States will not have the ability to deal with both Europe and Asia at a same time.
In addition to the needed increase in their military capabilities, Europeans must also make sure to restore their sovereignty at home, said Hodges, emphasizing that China owns more and more companies and infrastructure including more than 10% of European ports.