To utility, and beyond

In the not-so-distant past, I have seen cases of pretty blatant rip-offs of broker research titles by competitors, but I will gladly acknowledge that this title is copped from a Goldman Sachs note of a couple of years back. Just now, watching the CNBC Closing Bell program, featuring the unnervingly Frazier Crane-like Tyler Mathisen and the Sophia Loren of financial journalism, Maria Bartiromo, I heard a US fund manager comment that today on Wall Street, the dividend yield on telecom exceeded the yield on utilities for the first time in a quarter century.

Given that dividend yield moves inversely to share price, and keeping in mind that in some cases a very high yield may indicate increasing investor pessimism about the ability of future cash flows to support dividends (in other words, current profit and dividend projections may be too high), this development should probably send some new warning signals to investors. I'm out of the office today and without many of my cherished analytical tools, but I will look into this situation in a specifically European context tomorrow.

However, on the surface, the message out of the US is quite straightforward - despite volatility in energy prices, investors appear to be more willing to chase "boring" old utility stocks, trusting that their cash/dividend flows will be less risky over time than those of the telcos. Recent meetings with clients have borne this out to some extent. A "live-for-today" attitude shines through, and this sort of view is common - "We know the telcos are screwed, but in the near term there is no need for alarm - we'd just as soon take the yield and run, as long as things don't deteriorate suddenly."

The real crunch point is going to come when, at that inevitable future date, market conditions suddenly take a dramatic turn for the worse, and everyone wonders where all the nastiness is coming from. I keep thinking back to the Swisscom Q1 results presentation, which was entitled "Not the last, not the least." Here, a cash-rich company whose guidance was pretty much unchanged for the preceding three years, took a slight haircut in Q1, and management were speaking as though future results, though not representing a crisis, would never quite be the same again. I'd say the sector is on a genuine knife edge.