Pension Plans and Buying Utility Stocks

Copyright© 2002, by Albert W. Thomas All rights reserved

PENSION PLANS

If you have a pension plan at work you will want to read this and if you don’t you will still want to because it affects your retirement account. There are two kinds of formal retirement plans that are set in place by employers. The least complicated is the Defined Contribution where you are allowed to make your own contribution and your employer may also make matching contributions of a percentage of what you put in. At retirement you get out what you put in plus all accruals. The more you contribute the more you have for retirement. A professional money manager who tries to get the most return for the amount in the pool manages the money. He is paid an amount usually a percentage of the assets in the pool, not on performance.

Sometimes a large mutual fund such as Fidelity or Janus is the manager and you are allowed to choose from 6 or 8 different mutual funds in which to place your cash. They do not encourage you to switch from fund to fund even if a fund you are in is under performing. The Defined Benefit pension plan is much better for the employee. It states the amount you will receive monthly upon retirement. Your contribution amount is fixed and the company makes up the difference to be sure that there is enough money in your account so you will be paid the amount specified. The pension manager must use an actuarial table to figure how much money is necessary to be placed in the pool each year.

Recently it has been found that many companies have been using unreal rate-of-return figures for projection of profits. What the company is allowed to do under current law is to add any overage of calculation to their bottom line. Now it seems that those numbers have been far off so instead of your company showing a big profit last year they could be showing a loss. Suppose your manager had figured the plan would grow at 10% and now it has only grown at 5%. This could have a disastrous effect on your company’s bottom line and certainly on your company’s stock prices.

You might want to ask your company Controller or Treasurer for a report on how your pension plan is doing including what assumption they are making for return on investment. In a long-term bull market mutual funds do well, but in a long-term bear market mutual funds will lose money. No one talks about this, especially the mutual funds, but it is an obvious fact when you step back to look at the overall market performance for the past 75 years.

During a bear market there are only two types of funds you should have within a 401K or other retirement account to protect yourself from loss – either a money market account or a fixed income bond mutual fund. Better check it out.

UTILITY STOCKS

When we are in a bear market or a “correction” as some brokers and financial planners like to call this debacle many will recommend that you adjust your portfolio to buy some nice safe utility stocks or utility mutual funds. Let’s take a look at this sage advice before you go putting money into them.

There may be a few, very few individual utility companies that have stock that is going up. So far I have looked at scores of these stocks and the best I can find are a few that are going sideways. More than 90% are in a downtrend! As I keep telling people the trend is your friend – provided it is going up. If the trend is down you not only don’t want to buy that stock you definitely want to sell it. Once the momentum is obvious it will maintain the direction for months if not years. Don’t fall for the line that “this time it is different”. From 1932 it took the utility stocks longer to recover than it did the industrial stocks. If you have a computer you can use a free charting service by clicking on www.bigcharts.com and type in any stock or mutual fund symbol to see what the performance of that equity has been for the past year. If you don’t have a computer your library probably does. Let me suggest some symbols of utility mutual funds: FEUTX, FIUIX, CUTLX, BULIX and GASFX. That’s enough to make you very nervous and can see immediately why you would not want to own them.

The reason I have chosen utility mutual funds for analysis is because these funds are composed of many types of utility company stocks –electric generation, retail gas distribution, electric and gas transmission, cable companies and just about everything in what can be classified as a utility. Because the mutual fund has this broad spectrum you can see at a glance what is happening in the entire industry. Now come the $64,000 question. Why are they sinking? The answer is not obvious unless you are an accountant and understand balance sheets. Today most utility companies are loaded with huge amounts of debt. The more debt they have the more it takes away from their bottom line for interest payments to bond holders. One other factor that has not shown yet is the slowdown in demand for their products. Less sales means less revenues means less profit. When you reduce sales by a very small amount, even 2% to 5%, there is no place a utility can cut costs to save money because of their fixed investment in both manpower and capital structure. Their overhead remains relatively the same no matter what their sales are.

If your broker or financial planner has recommended utility stocks or funds your best answer is ‘no’. If you own some of these puppies your best bet is to sell them and put your money in a guaranteed no-load short-term bond fund or CD. Copyright Albert W. Thomas All rights reserved. Author of “If It Doesn’t Go Up, Don’t Buy It!”