Q-In 1992, I bought 100 shares of Southern California Edison Corp. at $40. It’s now split, and I have 200 shares at $19. Big deal. I’m an income investor and would like to know what’s wrong with this utility.
A-Southern California Edison (SCE-$18) provides electricity to 50,000 square miles of Central and Southern California, including more than 800 cities and 11 million people. It’s a dream service area; however, 1993 earnings will probably fall short of 1992’s earnings by nearly a dime a share. Last year, the anti-utility California Public Service Commission reduced SCE’s 1993 return on equity to 11.8 percent from 12.6 percent, the principal reason for SCE’s lower earnings.
The commission is not utility-friendly and, according to some knowledgeable people in Sacramento, there are a couple of people on the commission who would like SCE and California’s other public utilities to become state property. I’m told that regulatory proceedings “are labyrinthine and complex” and that “they are an intentional and time-consuming chamber of horrors and hurdles and make work to justify a bureaucracy whose eventual goal is control of the utilities it regulates.” Meanwhile, the commission doesn’t like the way SCE’s energy subsidiary keeps its books and has ordered the company to refund $250 million to 4.1 million customers.
For the third year in a row, the commission lowered SCE’s 1994 return on equity, to 11 percent, and SCE will be facing more lean years. It’s being thrice squeezed: by the commission’s strict regulation, by an anemic economy and by higher taxes. As a result, SCE may cut its work force by 15 percent and will peek under rocks for streamlining measures to cushion the blow.
Earnings are expected to fall for the fourth consecutive year, to $1.55 a share; however, the $1.42 dividend seems safe as a bear in a cave. SCE has solid finances and a strong $3.65 per share cash flow. The 7.5 percent yield is attractive, but a dividend increase is not in the cards for a few years.
Keep far away from California utilities until the regulatory climate shows signs of improvement. Fortunately, SCE doesn’t need to raise cash in the public market because there is little opportunity for earnings or dividend growth and its shares would be poorly received. California, which was once called the Opportunity State, has overregulated itself and is now considered investor-negative.
Q-I was widowed in 1986 at age 74, and my husband left me with the following investments: Wal-Mart, Texaco, IPALCO, Arizona Public Service and Exxon, which were worth $195,000. In mid-1986, I visited a broker who sold everything and bought the following: $75,000 Prudential Government Bond Fund, $26,000 Putnam High Income Government Trust, $26,000 American Capital Government Trust, $10,000 in Polaris No. 1, $10,000 in Polaris No. 2, $10,000 in Prudential Energy Income Fund and $35,000 in Hyperion. I was told they were safe, guaranteed and would pay $1,800 a month.
Today, my $195,000 is worth $136,000, and my income has dropped to $920. This, plus my Social Security and 68 acres of land (that he tried to talk me into selling), is all I have. Please help; tell me what happened. I need someone I can trust.
A-This is what Securities and Exchange Commission Chairman Arthur Levitt calls an “egregious example of commission-driven abuses.” If you had kept those stocks, they’d be worth more than $450,000 today. The wisdom of your investments reflects a salesman who drags his knuckles when he walks or has a room-temperature IQ. Those U.S. Government Bond Funds (especially Putnam’s) have disgraceful records. Polaris No. 1 and No. 2 are in litigation but may have some residual value.
That Energy Income Fund is another travesty (also in the courts) and could have residual value after the attorneys carve their piece of flesh. Hyperion is alive, but its pedicular parentage concerns me, and I wouldn’t touch it with a laser ray.
You must start afresh. Ring the discount broker whose name I’ve given you and disgorge all that junk. Call the close friend of mine who is a Denver real estate agent. He will sell your 68 acres (worth about $90,000) without a commission.
Then, invest the proceeds as follows: 50 percent in selected electric, gas and phone utilities to provide a 6.7 percent yield, annual dividend growth and moderate principal growth; 20 percent in health-care REITS yielding 8.4 percent with moderate principal and dividend growth; 20 percent in deep discount convertibles and straight debt yielding 12 percent; 5 percent in closed end funds yielding 10 percent; and 5 percent in strong dividend growth issues yielding 3 percent.
Your monthly income will be $1,330 and should increase a tad each year. And as we do with several other readers, we will monitor your issues and advise you by letter if a change becomes necessary.
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Malcolm Berko welcomes questions and comments. Write to him at P.O. Box 1416, Boca Raton, Fla. 33429.
