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 did not help during the global financial crisis when they, too, were sold off in 2007 and 2008.
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.
In contrast, many large property investors were forced to raise billions of dollars in fresh capital, with returns suffering as a result.
Each of these three regulated utility investors controls a spread of infrastructure assets - primarily electricity and gas distribution - where underlying demand is resilient and typically not affected much by the economic cycle.
And falling interest rates help 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, an 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 its power lines may have caused one of the fires, raising an element of risk that will take some time to resolve.
Spark raised $295 million in 2010 at $1 a share as it shored up its balance sheet before a large capital spending program and, last year, it brought its external management "in-house", with both moves helping to increase investor support for the stock.
It has subsequently enjoyed a steady share price rise of more than 30 per cent, prompting some analysts to downgrade their recommendation on 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," an analyst who did not wish to be identified said. "It also has an unregulated asset, the Dampier-Bunbury gas pipeline, which helps to differentiate it from others in the sector" which mostly hold regulated assets.
Other analysts are not so sure.
Ian Myles, at Macquarie Bank, 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 Australian Energy Regulator, and there is the margin for dividend upgrades."
He has a price target of $1.43 for Spark. "There's the potential of another 8? upside for the share price on our valuation, plus a dividend to come," he said.
With regard to Duet, he said it "is fair value at these levels". It closed at $1.81 yesterday.
SP AusNet shares the defensive aspects of the other regulated utility stocks but "at this point we prefer Duet or Spark," Mr Myles said.
"There are some issues to resolve [for SP AusNet] - the smart meter roll-out in Victoria and the bushfire civil suit."
Declining government bond yields are also positives, since they will help drive dividend growth.
"All have strong organic growth with large capex [capital expenditure] spends," Mr Chambers said. "M&A [mergers and acquisitions] hinges on whether the NSW government ever gets around to privatisation, but most have their hands full ... for the time being.
"With SP AusNet, we're looking for clarity over any possible bushfire liability," he said.
Frequently Asked Questions about this Article…
Why are infrastructure stocks like SP AusNet, Spark Infrastructure and Duet considered defensive investments?
Infrastructure stocks are often called defensive because they own regulated electricity and gas distribution assets where demand is relatively stable and less affected by the economic cycle. The article notes these companies tend to deliver steady returns and can appeal to yield-conscious investors, especially when interest rates fall.
How did regulated utility stocks perform during the global financial crisis?
The article says infrastructure stocks were also sold off in 2007–2008, but unlike many property trusts they largely came through the downturn with their balance sheets intact. That resilience helped them avoid the large capital raises and damaged returns that hit some property investors.
What are the main risks affecting SP AusNet that investors should know about?
SP AusNet faces specific risks highlighted in the article, including litigation tied to Victoria's 2009 bushfires amid allegations its power lines may have caused a fire, and uncertainties around the smart meter roll-out in Victoria. Analysts say clarity on any bushfire liability is important for the stock.
What actions has Spark Infrastructure taken to strengthen its balance sheet and investor support?
According to the article, Spark raised $295 million in 2010 at $1 a share to shore up its balance sheet ahead of large capital spending, and later brought its external management in-house. Those moves helped increase investor support and were followed by a steady share price rise of more than 30%.
How do falling government bond yields affect dividend prospects for infrastructure stocks?
The article explains that declining government bond yields are positive for yield stocks like regulated utilities. Lower bond yields can heighten the attraction of dividend-paying infrastructure stocks and help drive dividend growth.
How does Duet compare to the other regulated utilities mentioned in terms of yield and growth?
An analyst quoted in the article said Duet has a superior yield and growth profile and is differentiated by owning an unregulated asset, the Dampier–Bunbury gas pipeline. Other analysts, however, are more cautious, with some calling Duet fair value at current levels.
Are these utility companies expected to continue growing, and what drives that growth?
Yes. The article notes all three have strong organic growth supported by large capital expenditure programs. Growth is being driven by ongoing capex and investment in their regulated networks, while M&A opportunities may depend on broader government privatisation moves.
What are analysts saying about valuations and upside for Spark and Duet?
The article reports that Macquarie Bank favors Spark and Duet, with a current preference for Spark. Macquarie gave Spark a price target of $1.43 and suggested there could be roughly 8% upside plus a dividend. For Duet, Macquarie described it as fair value at the levels quoted in the article.
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