Warren Buffett's plans to acquire the parent company of Texas' largest electricity-transmission operator says a lot about the current appeal of the utility sector, according to industry analysts.
"They paid a lot for that utility business, but the arbitrage makes sense for Berkshire," said Travis Miller, energy and utilities strategist at Morningstar.
The
reported agreement has Mr. Buffett's Berkshire Hathaway paying
$9 billion in cash for Energy Future Holdings Corp., the parent company of Oncor Electric Delivery Co.
"The utility sector has been trading at record highs, and the Berkshire price reaffirms those record high valuations," Mr. Miller said.
But the appeal, he added, is the steady and predictable income for which utility-sector companies are known.
"Warren Buffett is doing, big picture, what everybody wishes they could do by locking down a long-term income stream without taking on duration risk," said Bob Rice, chief investment strategist at Tangent Capital.
Mark Matthews, investment research analyst at CLS Investments, described the deal as "Buffett doing what Buffett does best."
"He's buying for the long term and taking advantage of the regulated cash flow," Mr. Matthews added.
The income appeal of the utility sector can be illustrated by its 3.5% trailing dividend yield, which is a full percentage point above the yield of the 10-year Treasury bond.
Historically, the 10-year Treasury yield has been close to even with the dividend yield of the utility sector, according to Mr. Miller.
"Utility-sector valuations are at record highs, but the sector's dividend yields are at highs relative to all interest rates," he said. "If you map that onto Berkshire, which has a very low cost of capital, it makes sense that they're willing to pay a premium to get a utility with a very good cash-flow profile."
Utility-sector mutual funds, as a category, gained 7.5% this year through July 6, after gaining 14% last year.
By comparison, the S&P 500 Index gained 8.8% so far, this year, and gained 11.9% last year.
"Utility funds tend to be diversified, slower-growth, high-dividend strategies that can hold up in choppier markets," said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.
"What Warren Buffett is doing is making the utility sector a bigger piece of their diversified portfolio," he added. "If somebody wanted to follow the lead on that they should look to the utility sector to provide diversification and a ballast in the portfolio."
Larry Pitkowsky, co-portfolio manager of the $225 million
GoodHaven Fund (GOODX), said the utility sector is the best way to work around the troubled energy sector.
"It's not a surprise to me that Berkshire would be interested in the utility sector," he said. "Energy has been a terrible sector this year, but the utility sector is regulated and has a decent if unspectacular rate of return."
Or, as Mr. Rice put it, "Owning the energy transmission side puts you in the driver's seat, because as long as you own the pipes that everything has to go through, you're in good shape and you can avoid specific bets on different types of energy."
