Dividend-paying, low beta equities for choppy markets
Investors looking for long-term income may want to consider dividend-paying, low beta infrastructure stocks, which can add a level of protection to an overall portfolio during market downturns. Historically, companies within the communications, utilities, energy, and transportation sectors have not exhibited many signs of fundamental weakness due to the inelastic demand for the essential services they offer. Resilience of the underlying infrastructure assets tends to reward the stocks of these companies with relative outperformance versus the broader equity markets during times of market turmoil.
We remain optimistic about infrastructure equities as a source of long-term income for investors. Opportunities exist across all infrastructure sectors:
Communications — Europe’s communications sector continues to be challenged as trends remain difficult due to slow economic growth, cuts to regulated mobile termination rates, and increased competition in certain markets. In contrast, the fundamentals of U.S. telecommunications are somewhat more stable with good cash flow generation supporting dividends. For the first time since the 2000-2002 telecommunications bust, concerns about dividend cuts from major telecommunications companies have materialized. However, unlike the bust 12 years ago, we view these cuts as isolated to a few companies rather than an industry-wide trend, given lower debt levels and controlled capital spending. We also have a favorable view of towers and satellite companies due to their attractive revenue growth profiles and high margins.
Utilities — We prefer to limit exposure in European and Asian utilities and focus more on U.S. regulated utilities. Although European utilities benefited from a first quarter relief rally, we remain concerned about further fundamental pressures arising from the sovereign debt crisis and associated government austerity measures. We prefer U.K.-based utilities versus broader Europe, as the political and regulatory structures in the U.K. continue to display greater stability than many of its European counterparts.
Energy — We remain very positive on the prospects for North American energy markets given the continued growth in unconventional oil and gas production and strong demand dynamics. Even though the price of natural gas has dropped significantly and some exploration and production companies are reducing drilling, the energy pipeline companies owned in our portfolios are less impacted as contractual provisions limit their commodity exposure. Additionally, energy infrastructure companies with natural gas liquids exposure stand to benefit as the spread between oil and natural gas prices remains attractive on a historical basis.
Transportation — Within Europe, our preferred exposure is to transportation stocks, as toll roads, airports, and marine ports have all been less impacted by government austerity measures than utility companies. Despite the first quarter rally, transportation stock returns remain disappointing but better on average than those of continental European utilities. Given the potential economic strains that may result from austerity, we will continue to closely monitor road and air traffic data for related fundamental weakness.