With AAA companies slashing their payouts (GE), safe and reliable dividends have become scarce. Long known to be a steady source of dividends, the utilities have recently run into a myriad of troubles, causing some to doubt their previously rock solid high-yields.
Some utility companies have recently lowered their dividends including Constellation Energy (CEG), Ameren (AEE), and Great Plains Energy (GXP). A troubling thing is that many of the reasons for these cuts aren't company specific. Deteriorating demand and a tough credit market will inevitably affect even the strongest firms.
In most markets, companies can raise prices to offset higher costs. In the utility sector however, most firms need to get the government's permission to change rates because of their monopolistic nature. Because consumers have already been hit hard by the recession, regulators may be less merciful towards utilities. As we have seen in numerous other companies this year, these problems can result in credit downgrades, which makes it even harder to obtain new financing.
The 'double threat' of slacking consumer demand and a tricky credit market is more damaging to the utility sector than to most others. In the past few years, utilities have been on a growth spurt expanding fervently and taking on many new projects such as new power plants. These projects are tough to abandon because most companies have already poured millions into them and a half-built power plant is worthless.
Companies in Danger
Morningstar has listed four companies that they believe have their dividend payouts on the chopping block. They include:
-Pinnacle West (PNW)
-Hawaiian Electric (HE)
-PNM Resources (PNM)
Morningstar has also listed their top four picks that they believe can maintain their payments. The list includes:
-Westar Energy (WR)
-Northeast Utilities (NU)