Business & Money
The Utility Shareholder's Changing Face
July 15, 2003
By Greg Aliff and Branko Terzic
A new survey produces some surprising responses about investor attitudes.
As government agencies and industry experts report that the U.S. electric and gas infrastructure require significant enhancement and expansion, the electric and gas industries will need to turn to the private investor for massive new funding. A new survey from Deloitte and Touche (Deloitte & Touche National Survey of Individual Utility Investors) identifies both the demographics of the utility investor as well as the elements important to the investor when making the investment decision. We believe that this information will be valuable for regulators, who once again will need to look at the capital attraction standard in their utility ratemaking duties.
Typical Shareholder
The survey identified 501 individuals, or about 8 percent of the public, that owned electric or gas utility stock. Of these respondents, 61 percent were employed-close to the general population figure for employment of about 65 percent. Our respondent was more likely to be retired (26 percent) than the percentage of retirees in the general population (18 percent). The typical shareholder also is more likely to be male (61 percent of respondents), than female, given about a 50 percent balance in the general survey base. The demographics also show that utility stocks are owned by people of all age brackets and a broad range of incomes.
The typical utility stockholder also has had some college education, and 85 percent of utility stock owners are registered voters. Despite the "widows and orphans" theory of who owns utility stock, only 8 percent of these stock owners are widowed.
Buying and Selling
In response to the question, "What enticed you to buy the utility stock?" the survey shows that 22 percent of these shareholders bought stock that was recommended (13 percent by professional advisers and 9 percent by friends and family), and they bought the stock of their local gas or electric company (45 percent). Other reasons for acquiring stock were dividend payments (16 percent), reputation (8 percent), and inheritance (8 percent). In 8 percent of cases the respondent or spouse worked for the company in which they owned stock.
An additional set of detail questions asked respondents to rank the importance of various reasons for buying or holding utility stock. The reasons included "payment of regular dividend," "excellent management," "high population growth service territory," and "possible quick price appreciation."
When asked "What would entice you to sell the utility stock?" respondents listed "price drop" (21 percent) or "price increase" (15 percent) and the need for "money for other things" (18 percent) as top reasons. About 11 percent of respondents reported that they would not sell their stock.
Financial Information
The annual report is still delivered in paper format to 82 percent of utility shareholders, most of whom "read or glance" (77 percent) at it. An overwhelming majority (78 percent) find the information "useful." When asked which sections of the annual report are usually read, the financial statements (54 percent) and summary tables and charts (51 percent) significantly outrank the "president's letter" (30 percent), "management's discussion and analysis" (27 percent), and the financial footnotes (23 percent). We attribute this to shareholders' concerns about actual financial performance.
The proxy statement, according to our survey, is less well read than the annual report, with 56 percent responding that they read it (compared with 77 percent who read the annual report).
Measuring Management Performance
The survey asked the responding utility shareowners to select from a list of possible measures of management performance. The top three selections were "performance compared to other utility" (40 percent), "how much the stock price has gone up during year" (38 percent) and the "annual return on investment" (30 percent). The fourth choice was "size of dividend" (27 percent). We conclude that the size of the dividend may have been important at the time of purchase, but investors are now looking at actual performance to draw conclusions about how well an individual utility company is doing.
Investors appear to be "satisfied" (84.7 percent) with management's performance and split almost evenly on whether management compensation is appropriate (43 percent) or "too high" (41 percent). Directors are also given good marks for "representing shareholders' interests," with a 70 percent composite based on rating of "somewhat well" (40 percent), "very well" (24 percent) and "extremely well" (6 percent).
The final question was "Do you believe that nonmanagement members of the board are truly independent of management?" In this instance 55 percent of shareholders said "no" and 16 percent responded "don't know." Only 28 percent said yes. Read together within the prior question, one could say that while the directors are not viewed by a majority of utility investors as being truly independent, they are at least accorded the benefit of the doubt and thought to be representing the shareholders' interests. One would wonder whether the question of independence is viewed by investors as secondary to the issues of financial performance.
Our survey dispels a view, held by many, that utility stocks are largely held by widows and orphans who buy and hold the stocks for their dividends. Instead, utility stockholders vary in age, income level, and education, and they base their buy/sell decisions more on stock price and financial performance than size of dividend. Consequently, current and expected future performance will drive utility investors to the most attractive investment opportunities.
Regulators should take note of these utility investor dynamics as they consider their ratemaking responsibilities in an environment where utilities are faced with raising substantial capital to maintain and expand utility infrastructure and meet increasing environmental standards.
Greg Aliff is national managing partner of the Energy Resources Group at Deloitte & Touche LLP. Branko Terzic is director of Regulatory Services at Deloitte & Touche LLP and a former FERC and Wisconsin PSC member. For copies of the Deloitte survey, contact Sally Wilson at 703-251-4333, or swilson@deloitte.com.
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