Hi Paul -
Warren Buffet was asked a similar question regarding rising inflation with a falling (or weak) US dollar. Would he still want to invest in U.S. companies? His answer was yes as long as the company was bought at the right price (value), had a good business where earnings could grow and were some what predictable years into the future and provided goods or service that people had to use or buy. Over the long run, his "good" business would far exceed the return on bonds, especially treasury bills.
His reasoning is that as long as the business met these conditions, they could raise prices enough to cover any inflationary pressures. Human capitol will always demand the inflationary adjusted price in a free market. His example was with the local doctor in a small town.
Many of the "hybrid" utilities I have been scanning seem to fit his conditions especially "price" as many have sold off to where their PE's are well below their historical average. Regulated utilities provide services that everybody must have and use, provide a guaranteed return on capital (especially for new capital projects built in the future) but could be limited (or capped) as a true hedge against hyper inflation.
I try to find those utilities that have (unregulated) subsidiaries where they own the natural resource (NG, coal, oil, tree pulp, bio-fuels including switch grass,methane and algae, solar, wind, or other mineral rights), have unregulated distribution businesses (NG pipe lines, electrical interstate transmission lines) or own unique technologies that can be spun off into separate business units (electronic meter reading, bio fuel production eg algae, smart electricity grid transmission distribution, solar panel technology, at home NG fueling equipment for cars and trucks).
I have discovered that several U.S. domestic (mid-cap) utilities have been investing in these and other unique unregulated business units that complement their regulated sister or parent company. Some of these business units could potentially be a large income contributor in the future or it's assets could be worth much more (eg NG from shale) with inflation or much higher oil prices.
One of my favorites is Black Hills Corp. (BKH). Paul Senior brought this one to my attention. They have two hidden gems; Black Hills Exploration and Production, the oil and gas subsidiary ( bhep.com ) and Wyodak Resources Development Corp., the coal subsidiary ( wyodak.com ). The company has been approved to build a new NG electrical generation plant in Colorado providing for the integration and use of their subsidiary owned NG reserves.
I have focused my search just on domestic companies as several of the PE's are now at value prices. For example OGE's PE is 10 (forward PE is 9.4) historical 4 yr PE is 13.5. Based on Yahoo's analysts 2010 estimate of $2.71/share and a reversion to their mean PE of 13.5, my 2010 price target is $36.65/share, a 43% increase from today's closing price.
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Australia has a lot of natural resources. I have been looking at iShares MSCI Australia Index (EWA). It sold off to the high 14's earlier this week but closed today at $15.81. They pay their dividend once a year in December and now yields just under 6%.
I also like Canada and Brazil. I own energy trusts with properties located in both Canada and US. Brazil is tricky with my best performer being Petroleo Brasileiro (PBR).
My key investment theme I have been working on is to identify companies that deliver needed products and/or services that have core assets composed of natural resource. To help maintain pricing power, it helps if these core assets are used by a regulated entity (a parent or sister company) such as a utility.
EKS |
