With income generally considered safe, utility stocks have long been a favorite income play for retirees. However, climate change could put these plans at risk. Wildfires in Maui are the latest example of severe weather and threats to utilities. Hawaiian Electric, which currently has a dividend yield of 10.5%, has been wracked by concerns over its potential liability for the fires that killed at least 114 people. About 850 people are still missing. Shares have fallen nearly 63% since Aug. 7, the day before wildfires raged out of control and devastated Lahaina. While the cause of the fire is still under investigation, several lawsuits have already been filed against Hawaiian Electric, which operates Maui Electric. The suits accuse the company of negligence and failing to cut power to areas where high winds could bring down lines and cause fires. Hawaiian Electric told NBC News that it was focused on restoring power and stressed that the cause of the fire had not been determined. He declined to comment on ongoing court proceedings. Meanwhile, in a conversation with Evercore ISI, company management said they will have to consider liquidity and the level of uncertainty when making quarterly dividend recommendations to the board of directors, analyst Michael Lonegan noted on Aug. 16. Utilities in general had a tough year. The Utilities Select Sector SPDR Fund has an annual return of -8.6%, while the SPDR S & P 500 ETF Trust has a total return of 15% this year. However, investors can earn about 4% on stocks with dividends that are considered safe, making them attractive to income-seeking investors. XLU YTD Mountain Utilities Sector Select SPDR Fund Right now, utility executives and Wall Street analysts are struggling to understand the impact of climate change on the sector, said Neil Kalton, equity analyst at Wells Fargo Securities. “It’s growing and growing fast,” he said. “We think most utility C-suite executives will tell you that operating and maintaining a grid today in 2023 is much more difficult than it was 25, 30 years ago,” he said. “It’s really about the frequency of severe weather events, and it’s showing up through these catastrophic wildfires in the West.” In fact, it’s the western part of the country that faces the highest wildfire risks, according to FEMA. Therefore, the companies operating there are facing increasing problems, Calton said. Here are some of the names he believes are most at risk. Calton said California utilities trade at a discount of about 15% to 20% on a price-to-earnings basis relative to their peers, largely because of the risk of wildfires. “What we haven’t seen yet is other utilities facing similar cuts.” “There’s a comfort level among equity investors about how to think about that risk.” The Impact of Climate Change Climate change is changing not only Earth’s temperature, but also precipitation patterns, said Zachary Zobel, associate director of risk at the Woodwell Center for Climate Research. These patterns tend to be more of a “boom or bust cycle,” he said. Annual precipitation doesn’t really change, but there are fewer events, leading to longer dry periods, he explained. This leads to what Zobel calls “delicate fuel,” where tall grasses dry out quickly, unlike tall trees. In addition, the probability of drought increases due to both the pattern of precipitation and the increase in the temperature of the planet. The result is not necessarily more fires, but more acres burned. “It’s really how quickly a small fire can turn into a big fire,” Zobel said. “What causes these big fires is the speed at which it can get out of control from the spark.” Climate change can affect utilities in other areas, such as sustaining damage from hurricanes and floods. But wildfires are different in that the companies that cause the destruction can be held liable. In June, Berkshire Hathaway’s PacifiCorp was found liable for wildfires in 2020 after the company failed to shut down power lines during a storm. The jury awarded the plaintiffs more than $73 million in compensatory damages, with punitive damages still to be determined. PacificCorp has vowed to appeal and said it is confident it will win. Pacific Gas & Electric is under investigation for its alleged role in the California wildfires. Hakim is blamed for at least 31 fires that killed 113 people and burned nearly 1.5 million acres in a 2022 report. In early 2019, the company filed for bankruptcy. That same year, the company pleaded guilty to 84 counts of involuntary manslaughter for the 2018 Camp Fire that killed 84 people. PG&E reached a $13.5 billion settlement with victims of the state’s wildfires in 2017 and 2018. Last year, PG&E agreed to pay $55 million for the fires in 2019 and 2021. Where to invest Only small utilities are affected by wildfires. Wells Fargo’s Calton pointed to the overall sector interest rate. He said most publicly traded utilities are in the eastern two-thirds of the country and not in high-risk areas. When buying a utility fund, consider whether any of the names are in a high-risk area, he said. Certified financial planner Marguerita Cheng, CEO of Blue Ocean Global Wealth and member of the CNBC Financial Advisory Board, says that while utilities are generally seen as a safe dividend play, it’s also important to remember that diversification is important. “You don’t have to rely on just one sector to generate dividend income,” Cheng said. “Look for companies with a history of consistently paying dividends.” One way to find these companies is to look at the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), which tracks the S&P Dividend Aristocrats index. To be benchmarked, companies must show 25 consecutive years of dividend growth. — CNBC’s Michael Bloom contributed reporting.
Have climate change utilities made a risky bet? What income investors need to know