Milan Cacic
October 06, 2023
PIPES, BANKS, AND UTILITIES – OUCH!
Over the past few weeks, we have had quite a few questions regarding utilities, pipelines, and bank stocks. Basically anything that is considered conservative with a high dividend has been going down. The question people are asking us is “Why are they going down?”. The simple answer is that low-growth, high-yield companies trade a lot like bonds. When interest rates go up they go down and when interest rates go down they go up. The correlation is very close to 1.
As you can see from the chart below, the 10-year yield on a bond [grey line] has moved up considerably in the last couple of months which in turn has made the price of utility companies [red line] drop. It would not look much different if we overlaid a bond index, bank index, or dividend index on this chart. A laddered bond portfolio is also down over 5% in the last two months. Simply put, rising interest rates mean investors demand higher dividend rates on their stocks. Companies either have to increase their dividends or face stock prices dropping down to a level where investors are happy to hold them.
Source: Thompson One Oct 5,2023
These recent price drops have made pipeline companies like Enbridge and TC Energy trade at yields above 8%, while Telco's like Telus and BCE are trading at 7% yields, and Canadian banks yields are almost 6%. From a historical perspective, these yields are quite high. We also know that, historically, when interest rates start to go back down, the price of these companies will go up and their yields will drop.
So the real question is "when will long-term interest rates start to drop?". That answer is a little more complicated. However, if you believe the futures market then the answer is sometime in the first quarter of 2024..
I've also included a piece from our CIBC Economics Team entitled "Variable lags".
As always, if you have any questions please feel free to give us a call at any time.
Have a great Thanks Giving Day weekend!
Milan