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By Allan Robinson
Investment Reporter
The Globe and Mail
Report on Business
Tuesday, March 29, 2005
The shares of Canadian utilities have surged almost 23 per cent from their lows of last summer, but some investors, worried about the prospect of higher interest rates, are opting to take profits.
Adrian Mastracci, investment counsel at Vancouver’s
‘fee-only’ KCM Wealth Management, says, “For most investors, the key strategy is to remain diversified.”
"The rising interest rate environment is catching up with utility stocks," says Merrill Lynch Canada Inc. technical analyst Dennis Mark.
The eight-company S&P/TSX utility index closed yesterday at 161.40, which is down from its 52-week high of 169.34, but well up from last summer's low of 137.76.
"A breakdown from a three-month top on the S&P/TSX utilities index is reversing a rising trend over the past nine months," Mr. Mark said. If the index were to trade at its 200-day moving average it could decline to about 154, he said in a report yesterday.
The current yield on the shares of most of the utilities in the group falls between the 3.18 per cent for Fortis Inc., parent company of Newfoundland Light & Power Co., and the 4.14 per cent for oil and gas company TransCanada Corp.
The common shares of TransCanada are representative of the group. They are testing "key short-term support" of $29.45 a share, according to Mr. Mark. A breakdown below that price would reverse the nine-month rising trend, and "downside tests of $28 and $26 a share may be possible," he said.
The two highest yielding companies in the utilities group are Emera Inc. and TransAlta Corp., which yield 4.81 per cent and 5.52 per cent, respectively. The outlook for both Emera and TransAlta remains challenging, according to recent reports by CIBC World Markets Inc.
Emera faces downward pressure on its earnings in 2005 because of lower energy marketing margins, a lower regulatory rate of return by it operating arm, Nova Scotia Power Inc., and higher fuel costs, CIBC said. TransAlta also faces lower profit in 2005 and 2006 as a result of lost production from maintenance shutdowns, CIBC said.
The lowest yield of 2.44 per cent is paid by Atco Ltd., which operates natural gas and electric generation facilities as well as other global businesses providing project management, technical services and transportable work force shelters.
For many small investors, actively trading utility shares might not be a profitable option. "There's really not a great deal you can do," says investment counsellor Adrian Mastracci at KCM Wealth Management Inc. of Vancouver. "The discipline of sitting on cash is wonderful, but you have to figure out when to get in and when to get out."
For most investors, the key strategy is to remain diversified, Mr. Mastracci said in an interview. "I don't think interest rates will increase that much in the next little while. I think you have some time to prune back here. I don't think you have to do anything drastic."
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