Warren Buffet injects his funds in businesses with a lower amount of capital investment cost and higher returns, thus generating income for its shareholders. His investment of $1.7 billion to acquire US-based electric utility MidAmerican Energy in 1999 marked his entry into the utility business, and since then Buffet has shown interest in a range of utilities across the US.
With significantly expanding business, one thing was clear that the decision to enter the utility business was a fair deal for Warren Buffet. The acquisition of MidAmerican gave Warren Buffet significant understanding into an industry that was less understood and believed to be a great place to deploy capital.
Although the utility sector comes with a significant number of regulatory constraints, we can always manage to make additional investments and commitments in the sector, for which the amount involved could be large.
As in a prospective acquisition, Warren Buffet looks for several factors including low risk, and investment in the utility sector is generally considered as a low-risk investment. However, this may not be the only reason that could prompt Warren Buffet or anyone to invest in the utility business.
Ever since then, the portfolio of Berkshire Hathaway Energy (BHE) has broadened and now consists of locally managed businesses that share a vision for the future while aiming to deliver safe and reliable service. The businesses of BHE include
- MidAmerican Energy Company,
- NV Energy,
- Northern Powergrid,
- Northern Natural Gas,
- Kern River Gas Transmission Company,
- BHE U.S. Transmission,
- BHE Renewables (including BHE Solar, BHE Wind, BHE Geothermal, BHE Hydro as well as renewable project development and commercial management)
- HomeServices of America, Inc.
The idea of deploying capital into the utility segment proved to be a fruitful one for Warrant Buffet, as BHE now operates on a considerable scale and has significant coverage through its businesses, setting up high-performance standards in every area.
Utility Stocks In NZ
Speculations about upcoming uncertainties in the market are surfacing since the market bounced back last week, as the fall in NZX has been a moderate one when compared with other global equity markets.
Investors have been looking toward utility stocks trading on NZX since a modest bounce back in the market with utility stocks holding the charm. The S&P/NZX 50 Index, which captures performance of the 50 biggest, eligible stocks listed on the Main Board (NZSX) of the NZX, managed to gain 0.99% during the day’s trade on 30 March 2020 amidst the uncertainties fuelled by the Covid-19 pandemic.
Utility stocks do carry the likeliness of delivering advantage of defensive position to investors, and a majority of investment in utility stocks are made by income investors as companies in the utility sector are governed by the regulations of government, thus limiting free entry into the market.
With limited competition, utilities can turn out to be leading services in the society, and therefore utilities tend to be highly resilient to economic cycles.
Although many of the indices on the NZX ended the day’s trade in red zone on 30 March 2020, not everything ended at the bitter end. In similar fashion to the S&P/NZX 50 Index, the S&P/NZX All Utilities index was up 0.93% on 30 March 2020 and settled at 1,804.360 points.
The S&P/NZX All Utilities comprises of the stocks that are members of the S&P/NZX All Index, considered:
- The total market indicator for the New Zealand equity market
- Classified within the utility sector of the Global Industry Classification System
Utility stocks like Genesis Energy Limited (NZX:GNE), Contact Energy Limited (ASX:CEN) and Trustpower Limited (ASX:TPW) settled in the green zone on 30 March 2020. Moreover, several other stocks like Cavalier Corporation Limited, Kathmandu Holdings Limited, NZ King Salmon Investments Limited, Burger Fuel Group Limited and The New Zealand Refining Company topped the table for the top gainers of the day on 30 March 2020.
Genesis Energy Limited
Coming back to the utility stocks; Genesis Energy Limited is a diversified New Zealand energy company that engages in the commercialisation of electricity, reticulated natural gas and LPG. Being New Zealand’s largest energy retailer, the Company caters to its approximately 500,000 customers through its retail brands of Genesis Energy and Energy Online.
The Company produces electricity from a wide range of thermal and renewable production assets situated across the country and has an interest (46%) in the Kupe Joint Venture that owns the Kupe oil & gas field offshore of Taranaki.
The stock of Genesis Energy Limited was up by 3.88% intraday and closed at $2.410, on 30 March 2020.
Contact Energy Limited
Another utility stock, Contact Energy Limited (ASX:CEN) is a sustainable energy company that engages in electricity generation with more than 80% from renewable sources. The Company focuses on offering great value, great products and great service to its customers.
Being an energy company focusing on sustainability, the Company has reduced its emissions by 59% since 2012 and has planted more than 25,000 native plants in the year gone by.
The stock of Contact Energy Limited inched upward by 3.11% and settled at $5.640 on 30 March 2020.
Being a leading name on the New Zealand Stock Exchange, Trustpower Limited (ASX:TPW) serves a significant number of businesses of all sizes across New Zealand by offering an unmatched range of energy, internet and phone services.
The Company also offers power, gas, broadband and solar solutions for household customers. As a publicly listed company, Trustpower focuses on generating returns to its shareholders through the generation of electricity, retailing of energy and offering telecommunication services.
The stock of Trustpower Limited ended the day’s trade with a gain of 1.85% and closed at a price of $6.060 on 30 March 2020.