This week's jittery market is making some investors look for safer-than-usual investment havens. Recently, I reported on companies with fairly low price-to-earnings ratios, which are considered defensive. Today, however, I want to discuss a couple of companies that are also defensive plays, but for a different reason: They are utility companies.
Utilities frequently lack the economic and market gyrations of more traditional businesses. They are tightly regulated, often in a largely monopolistic market position (which is why they are regulated), have fairly steady demand and sport relatively high dividend yields. If the market's current movement has you on edge, consider investing in one or both of these companies.
Alliant Energy (LNT) provides electric and natural gas services in Iowa, Wisconsin and Minnesota, where it has more than 1.4 million customers. It is the parent of two regulated utilities, Interstate Power and Light and Wisconsin Power and Light.
Peter Lynch was a great mutual fund manager who wrote about his approach to investing in the best-selling book One Up on Wall Street. I took what he said about investing and automated it, which allowed me to analyze any stock in a similar way to how Lynch analyzed stocks. (I automated the strategies of over 10 investment gurus, including Lynch.)
Right now, my Lynch-based strategy recommends Alliant. The most important Lynch variable is the P/E/G ratio, which is price-to-earnings relative to growth, a measure of how much the investor is paying for growth. A P/E/G up to 1.0 is acceptable. Alliant's yield-adjusted P/E/G is at a desirable 0.80. In addition, the company's debt-to-equity ratio is at a good level for a utility (which tend to have high levels of debt when compared with other businesses). The stock's yield is 3.58%.
Another Lynch-strategy teacher's pet is Ameren (AEE). Operating in Missouri and Illinois, Ameren generates, transmits and distributes electricity and natural gas. The stock's yield is 4.16%. Ameren's P/E/G is similar to Alliant's, at 0.86, while its debt-to-equity ratio is almost identical, too.
Utilities generally do not make people rich; you will not hit a home run with one of these companies. But you should enjoy a steady, fairly high dividend yield and consistent long-term growth. If you take a long-term view of investing, these are very desirable traits.
