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When a Utility Stock Isn’t Just a Utility

Some utility companies have surprising side businesses

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The firm is also the owner and operator of the third-largest bank in the state. That opens shareholders up to a whole mess of different risks — underperforming commercial loans, Frank-Dodd regulations, debit card swipe fee rules etc. — than they were expecting by purchasing utility shares.

Perhaps more frightening is that the bank subsidiary has actually been the main driver of earnings in recent quarters. Lower electricity sales and high fuel oil prices coupled with regulators inability to grant a rate hike have hurt the generation business. With the bank now at the forefront of the utility, any financial issues could upset the balance and send dividends crashing.

Another example could be diversified utility Allete (ALE). The firm does it all and provides the trifecta of regulated utility services — electric, natural gas and water — through its various subsidiaries in Minnesota and Wisconsin. However, “doing it all” also extends towards many other businesses not even remotely related to providing essential services. Auto auctions? Check. Owning nearly 10,000 acres worth of real estate in Florida? Check. How about a coal mine? Allete has that, too.

Luckily for ALE  investors, managers at Allete have been very successful at allocating capital towards these side businesses. Although, owning a coal mine comes with a different set of risks than transmission lines.

Finally, Missouri’s Laclede Group (LG) is technically a natural gas utility, and at first blush its non-regulated side businesses fit that mold: pipeline assets, liquid propane transportation as well as energy trading. What doesn’t fit is its 28.5% interest in LBP Partnership, a company which previously engaged in research and development of light beam profiling technology. Laclede also owns a real estate development arm as well as an investment group that makes commercial loans and owns other publicly traded stocks.

Now I’m not saying that these are overall bad stock bets. The lesson here is that investors looking at adding power and water firms to a portfolio for their dividends need to do some digging before they jump the gun. And keep in mind, that rule extends to broad sector plays as well — all three of these “utilities that aren’t just utilities” are found in the $1.7 billion Vanguard Utilities ETF (VPU).

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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