Stock Analysis In Utility Company
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Stock Analysis In Utility Company

Published by: Joe Kok (8)
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Investing in utility companies can be a good investment opportunity if the price of the stocks are good. First of all, customers buy their furniture and jewelry locally, just as they do electricity. Second, these industries are all likely to continue to grow because of increases in population and standard of living among the community. Third, the management of the utility company must be good and efficient. All these three main reasons are why you should invest in utility company stock as a start.

Most state regulators allow utilities to earn a return on equity of about 10 percent. Utilities, regulated or otherwise, do not earn a high rate of return on equity, but most of them earn a steady rate of return. Thus, normally they are considered to be low risk investments, but their long run stock market returns are only a tad below the corresponding returns from industrials.

From data available for 1993 to 2008, compounded annual returns on Dow Jones Utilities index including dividends are 7. 8 percent in comparison with 8. 6 percent for the Dow Jones Industrial Average. Overall, it seems like invested in utility industry to earn a reasonable rate of return, somewhat better than the rate anyone could earn by investing in medium or long-term bond. In the long run, there may also be profitable growth opportunities because of the outstanding management of the utility company.

We buy good companies with outstanding management and good growth potential at a fair price. Four very crucial criteria in addition to price are an outstanding management, a good company, a good growth potential and also patience in you to wait longer for a better rate of return to be realized. In utility sector, the growth potential for good companies appears promising, but an investor may have to wait for a long time to realize any actual growth. You are not likely to earn high rates of return by investing in a utility.  

The best time to invest in a utility is probably when a utility’s book return on its equity goes down, affecting the stock prices negatively. This can occur when input prices of coal, gas, and the like go up, or when customer demand goes down, or even when the interest rates go up.  Until that time, a utility would appear to be a good value investment then. Of course, you should invest only in healthy companies to avoid you lose your investment completely when a company is not able to survive the slump. 

Joe Kok - About the Author:

A good stock analysis skill is require for stock market trading.


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