How “Recession-Proof” are Utilities?

By Kathleen Davis, associate editor

While economists and the government bicker about whether we are or are not in an actual, literal “recession,” just about every American is feeling the pinch. Articles, news clips and entire books abound about how to weather the recession and which towns, jobs, and industries are “recession-proof.”

Just today–as of the writing of this article–The Motley Fool touted utilities as a stock and business that is just that: recession-proof. But, is that true?

According to the author, around a dozen utility-based ETFs (or exchange-traded funds) exist today. They’ve been around for almost a decade, and, while they don’t leap ahead like the tech and real estate markets, they do make a steady 3 percent yield–not spectacular, but not negative either. And, in these economic times, anything “non-negative” is good.

No one expects a “slow and steady” fund to collapse in on itself like a house of cards. Most large leaps of monetary return were based on speculation and faith in continued insane growth–two items without a tangible base. The one thing utilities have going for them is a significant tangible base: We all need power. We all need the lights to come on.

Technically, according to Maslow’s “hierarchy of need,” we don’t have a genetic necessity for electricity. But, anyone who has spent any time without power would tell you a very different story.

So, that makes utilities recession-proof, right? We all need it. We’ll all pay for it. Well, yes and no. Does it make utilities a safer bet? Positively. Does it make the utility industry recession proof? Not really.

The problem hinges on a lack of market. That’s not what The Motley Fool would tell you. The author’s notes of “negatives” for the utility ETFs list all the stuff we talk about here daily: a need for significant infrastructure investment, growing demand, high oil prices, growing cries for renewables–stuff that costs cashola and may require the utility to pay out what an investor might like to pocket.

All of those things are important, but they are not new. In my theory, what keeps this industry from being recession-proof is its lack of market freedom–the very reason we consider it a “tangible” need. Being necessary is its biggest downfall as far as investment goes.

Think of it this way: What do you do if you don’t have the money to buy a new pair of shoes? You shop around, look for the cheapest pair. If you’re really poor, you don’t get any shoes; you duct-tape up the old ones and call it good. But, what if the shoe salesman couldn’t deny you a pair of shoes, according to the law? What if he had to go through hoops, let you run up an account, ask for permission from the government or the city or the country to NOT give you those shoes? Additionally, what if he can’t up the price of his shoes–even when leather prices are sky-high–without permission from a commission?

This is the problem with a necessity. The market isn’t allowed to fluctuate and adjust according to supply and demand, wealth and cost. Instead, the market is partially controlled by regulators, which makes it significantly harder to raise the price of the product or deny the product (in some cases).

The basic idea is, even with less money coming in (due to a recession or economic downturn), there’s still a steady stream of product going out–a potentially deadly situation to investor returns. You’re eating up money that isn’t being replaced with income.

Do I personally believe in open markets for electricity? Actually, no. As a “necessity,” I believe in regulating it. My argument here isn’t for an open market. My argument is that the very reason analysts see utilities as “recession proof” could actually lead this industry down the opposite path–some serious hits on the chin, with little-to-no ability to throw counterpunches.

It is, of course, unlikely that this economic situation will “trickle down” so far into the American pocketbook that they can’t pay for power, but believing that our industry is recession-proof seems to me a lovely, but naive dream.

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