That little wiggle you felt a few weeks ago wasn’t a result of overeating the day before. It was the world shifting. In a meaningful way.
As you may have heard by now, in May, Barclays downgraded Electric Utility bonds across the United States.
For the past several decades, utility companies of all stripes have been one of the best places to park money for safety and income. After all, turning off your power, water, or gas was the last thing you would do if you were in a period of financial difficulty. You might cut back on luxuries, wear your clothes another season, put off retirement savings(!), or even sell you car. By the time you get to the point of not paying your utility bills, you are in pretty dire straits; it’s one of the last places people cut expenses. Add to this the fact that if a utility get into financial trouble (whether of its own making or not) they have a great deal of power to raise their rates. The realpolitik of the situation is that the electric company has you over a barrel, and they know it. When you flip the switch, you want the lights to go on; it’s that simple. Most people will complain about price increases, but they will complain as they are paying the bill. Cutting out water, electricity and natural gas delivery to your home really isn’t something anybody ever wants to do. This is one reason that utility stocks are known as “widow and orphan” stocks; they’re as reliable as anything can possibly be.
The reason Barclays downgraded the debt of electric utility bonds is the increasing efficiency, decreasing price, and the increasing market penetration of household solar power. Coupled with improved storage of solar power (until now a major Achilles’ heel of solar power) Barclays sees this as a long-term threat to the stability of the industry. They feel that electric utilities can no longer be counted among the safest of investments.
In their own words:
Electric utilities… are seen by many investors as a sturdy and defensive subset of the investment grade universe. Over the next few years, however, we believe that a confluence of declining cost trends in distributed solar photovoltaic (PV) power generation and residential-scale power storage is likely to disrupt the status quo. Based on our analysis, the cost of solar + storage for residential consumers of electricity is already competitive with the price of utility grid power in Hawaii. Of the other major markets, California could follow in 2017, New York and Arizona in 2018, and many other states soon after.
In the 100+ year history of the electric utility industry, there has never before been a truly cost-competitive substitute available for grid power. We believe that solar + storage could reconfigure the organization and regulation of the electric power business over the coming decade. We see near-term risks to credit from regulators and utilities falling behind the solar + storage adoption curve and long-term risks from a comprehensive re-imagining of the role utilities play in providing electric power.
Alarmist headline grabbing? Only time will tell.
By coincidence, earlier this week, I was reading a university text on microeconomics that was published in 2007. In it, the authors wondered if the days of the DVD rental shop weren’t numbered. Here we are seven short years later, and I bet that very few of us could point to more than one or two DVD rental shops in our home towns. Granted, DVD rentals aren’t as fundamental to the economy (or anything else) as electricity, but you have to admit that movie rental shops were a pretty well-entrenched part of the consumer landscape for three decades. To think that they’re all but gone now is sobering.
Need another example? How about the Yellow Pages. (Kids, ask your parents.) YLO.UN went from being an absolutely solid distribution payer to completely re-structuring themselves, fighting for their very survival, and completely eliminating payments to shareholders — although I have to admit that the new stock has done fairly well for itself.
As I look for “as sure as possible” investments (I have deliberately avoided using the word “guarantee”) the list keeps getting shorter. We are living in amazing times, and it’s important not to become too set in one’s investment theses. The biggest lesson from all of this? There are two, the way see it: 1. Don’t be complacent. Keep your eyes open as we move into our collective brave new world, and 2. Diversify. Placing too much of a bet on anything (whether you’re talking about a single company, or even an entire industry) is simply foolish.
Maybe there’s no such thing as a “sure investment” anymore.