Investors Start to Cool on Utilities

An American Electric Power coal-fired power plant in West Virginia


Photo:

brian snyder/Reuters

Utility stocks haven’t been climbing in August as much as some analysts and investors might expect given the sharp drop in bond yields recently.

NextEra Energy
Inc.,


NEE 0.66%

American Water Works
Co.


AWK -0.19%

,

Southern
Co.


SO 0.80%

and

American Electric Power
Co.


AEP 0.35%

have outpaced the S&P 500 this month, climbing at least 3.1% in August. That gain is seen as relatively modest given that investors have flooded into government bonds in recent weeks, pushing yield on the 10-year Treasury note to multiyear lows.

Utilities are typically viewed as bond proxies because they pay relatively high dividends and tend to have steady earnings during times of economic uncertainty. Bond yields fall as prices rise.

One reason, analysts say, is because S&P 500 sectors perceived as safer—such as utilities, consumer staples and real estate—have been outperforming the broader market over the past three months, a reversal from earlier this year when cyclical sectors tied to the health of the U.S. economy sent major stock indexes to records. Analysts said utility stocks didn’t have as much room to rise after that rally.

Another reason investors are lukewarm on utilities comes from lingering concerns about what

PG&E


PCG -25.28%

’s safety issues could mean for the broader industry. PG&E shares slid 25% Monday after a judge ruled that a jury could decide whether the company’s equipment caused the second-worst wildfire in California history. Its was the stock’s worst day since Jan. 14. Shares of some of the largest utility companies were little changed.

“PG&E has made a lot of people concerned about whether or not these companies have been making the capital reinvestment to keep their businesses safe,” said

Tom Plumb,

portfolio manager at Plumb funds. “Normally you would have thought that lower interest rates would have fueled money going into utility stocks, but it hasn’t.”

Shares of PG&E have lost 76% of their value over the past 12 months as the company faces an estimated $30 billion in damage claims from wildfires linked to its equipment.

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