INFRASTRUCTURE stocks should be one of the most defensive areas for investors to have an exposure to during times of financial upheaval, thanks to their steady returns.
But that didn't help during the global financial crisis when they, too, were sold off.
Even so, unlike property trusts, which have also been traditionally favoured by conservative, yield-conscious investors, regulated infrastructure stocks such as SP Ausnet, Spark Infrastructure and Duet, have come through the downturn largely unscathed, with their balance sheets intact as many large property investors were forced to raise billions of dollars in fresh capital, with investor returns suffering as a result.
Each of these three regulated utility investors controls a spread of infrastructure assets primary electricity and gas distribution where underlying demand is resilient and typically not affected much by the economic cycle.
And falling interest rates helps to heighten the potential attractions of this sector of the sharemarket for yield-conscious investors.
"It may be negative for operating earnings but . . . as yield stocks they come into their own," Matt Chambers, analyst with Legg Mason Equities said of the sector.
But even with their insulation from the economic cycle, problems can still emerge.
SP Ausnet, for example, has been caught up in litigation surrounding Victoria's devastating 2009 bushfires amid allegations that its power lines may have caused one of the fires, raising an element of risk that will take some time yet to resolve.
Similarly, Spark raised $295 million in 2010 at $1 a share as it shored up its balance sheet ahead of a large capital spending program and, last year, it brought its external management "in house", with both moves helping to boost investor support for the stock.
Subsequently, it has enjoyed a steady share price rise of over 30 per cent, prompting some analysts to downgrade their recommendation towards the stock, given the decline in the yield and the prospect of better value elsewhere in the sector.
"Duet has a superior yield and growth profile at present," said one analyst, who did not wish to be identified.
"It also has an unregulated asset, the Dampier-Bunbury gas pipeline which helps to differentiate it from others in the sector" that mostly hold regulated assets.
Other analysts are not so sure.
Macquarie Bank analyst Ian Myles favours Spark and Duet, but with Spark preferred at present levels. "The valuation remains relatively robust," he said of Spark. "It has won the points of contention in its dispute with the regulator, the Australian Energy Regulator, and there is the margin for dividend upgrades."
He has a price target for Spark of $1.43.
"There's the potential of another 8? upside for the share price on our valuation, plus a dividend to come," he said. "Duet is fair value at these levels. We'd prefer Spark."
SP Ausnet shares the defensive aspects of the other regulated utility stocks but "at this point we prefer Duet or Spark," Mr Myles said.
SP Ausnet has been hit with a legal claim that faulty and/or defective power lines caused loss and damage, which it is defending.
'Mr Myles said declining government bond yields were also positives, since it would help drive steady dividend growth thanks to ongoing rises in the size of their rated asset bases.
Frequently Asked Questions about this Article…
Why are infrastructure stocks considered defensive investments for everyday investors?
The article says infrastructure stocks—especially regulated utilities that own electricity and gas distribution networks—are seen as defensive because they deliver steady returns and underlying demand for their services is resilient and less tied to the economic cycle. That stability can appeal to yield‑conscious investors during market turmoil.
How do falling interest rates affect infrastructure stocks and dividend yields?
According to the article, falling interest rates can make yield stocks, including regulated infrastructure names, more attractive to investors. While lower rates may be negative for some operating earnings, they tend to heighten the appeal of dividend yields and can help support steady dividend growth as government bond yields decline.
How did infrastructure stocks perform during the global financial crisis compared with property trusts?
The article notes that infrastructure stocks were sold off during the global financial crisis like many sectors, but unlike many large property trusts that were forced to raise fresh capital and saw investor returns suffer, several regulated infrastructure stocks (SP Ausnet, Spark Infrastructure and Duet) came through the downturn largely unscathed with their balance sheets intact.
What risks should investors be aware of when buying regulated utility stocks like SP Ausnet?
The article highlights that regulated utilities can still face significant risks. For example, SP Ausnet was caught up in litigation over Victoria’s 2009 bushfires amid claims its power lines may have caused one of the fires. That legal risk could take time to resolve and affect the company.
What recent corporate moves did Spark Infrastructure make to strengthen investor confidence?
The article reports Spark raised $295 million in 2010 at $1 a share to shore up its balance sheet ahead of large capital spending, and it brought external management in house. Those actions helped boost investor support and coincided with a steady share price rise of over 30%.
How does Duet compare with other regulated infrastructure stocks in terms of yield and assets?
The article quotes an analyst saying Duet currently offers a superior yield and growth profile. Duet also holds an unregulated asset—the Dampier‑Bunbury gas pipeline—which helps differentiate it from peers that mostly own regulated assets.
Which infrastructure stocks did analysts favour in the article and why?
Macquarie Bank analyst Ian Myles favoured Spark and Duet, with a current preference for Spark at then‑present levels. He cited Spark’s robust valuation, resolution of disputes with the Australian Energy Regulator and scope for dividend upgrades; he also gave a price target for Spark of $1.43 and suggested there was potential upside plus a dividend to come.
Are regulated infrastructure stocks a good source of dividend income for conservative investors?
The article suggests they can be. Regulated utilities often attract yield‑conscious, conservative investors because of steady demand in electricity and gas distribution and the potential for reliable dividends. However, the piece also warns investors to watch company‑specific risks (for example legal issues or capital needs) and valuation changes that can reduce yields.
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