Summary
US regulated utilities are a big part of the global listed infrastructure world: the electricity, gas, and water providers that largely make up the sector account for more than 50% of the Lazard Global Listed Infrastructure strategy's preferred investable universe, or approximately US$1.1 trillion in market capitalization. It is a significant corner of the market to which we, and any listed infrastructure manager, must pay close heed.
Rock-bottom interest rates and relatively stable allowed regulatory returns have made US utilities stocks a favorite with investors in recent years, underpinning strong share price performance. However, the sector has come under pressure in 2023, as higher interest rates have narrowed the gap between bond yields and allowed regulatory returns.
This recent share price weakness has sparked comment from some in the buy- and sell-side community that US regulated utilities now merit a close look, given their price-to-earnings ratios have fallen by roughly 25% over the past year and currently sit at levels not seen in almost a decade.
We have a different perspective, having maintained a cautious view on the sector for some time: we hold just 10% of the portfolio in US regulated utilities stocks. In this paper we outline why—with some exceptions—we still believe the sector remains overvalued, why these excessive valuations remain the key risk for the asset class, and why share prices need to fall further before we find the sector attractive.
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Published on 6 December 2023.
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