Barron's - USA (2021-02-08)

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February 8, 2021 BARRON’S 19


ombudsman.


Consumer financial-services firms


should expect the CFPB to review rules on


payday lending, debt collection, student-


loan servicing, and fair lending, lawyers


say. The bureau may also reverse the regu-


latory flexibility that it granted early in the


pandemic to mortgage servicers that


missed deadlines for sending loss-mitiga-


tion notices, and credit bureaus and lend-


ers that were slow to investigate disputes.


New cryptocurrency regulations may


also be on the horizon. Gensler in recent


years has done research and taught


courses on blockchain and digital curren-


cies as a professor atthe Massachusetts


Institute of Technology.


The SEC may take a look at when digital


assets are deemed to be securities and how


they can be packaged into products like


exchange-traded funds and sold in line


with existing securities regulations, says


Amy Lynch, president of FrontLine Com-


pliance and a former SEC examiner.


Both the SEC and CFPB are expected to


dial up enforcement actions. Acting CFPB


director Dave Uejio, a veteran at the bu-


reau, has already directed its enforcement


division to expedite pandemic-related in-


vestigations. While the Trump-era CFPB


didn’t make Covid-related consumer harm


a focus of enforcement actions, it did leave


behind a road map of such issues that


might help guide the bureau’s new efforts.


As part of its supervisory work, the CFPB


last year sought information from compa-


nies on their pandemic response and chal-


lenges they were facing.


The assessments “were not designed to


identify violations of federal consumer


financial law,” according to a summary of


the findings published in mid-January, but


revealed consumer harms ranging from


inaccurate credit reporting to mortgage


servicers providing faulty information to


consumers about forbearances and failing


to process forbearance requests.


Given the bureau’s relatively light en-


forcement under Trump appointee Kath-


leen Kraninger, the findings suggest that


companies may have been “lulled into a


sense of sharing information that’s not


going to come back to haunt them,” says


Brian Fink, a lawyer at McGlinchey


Stafford and former program manager in


the CFPB’s office of supervision policy.


Now, he says, “the aggressiveness that ap-


pears likely to come is not something that


makes people sleep well at night.”


Sustainable investors are looking for


actions from regulators that could bolster


holdings that score well on ESG metrics.


Biden campaigned on requiring public


companies to disclose climate risks and


board diversity.


outlook through 2024.”


Within the sector—known for steady


but modest dividend increases—there are


plenty of utilities that have boosted their


recent payouts at a high-single or even


double-digit clip. A recentBarron’sscreen


highlighted some of those companies, in-


cludingNextEra Energy(NEE), whose


assets include the regulated Florida Power


& Light utility as well a growing renewable


energy business.


From 2017 through 2019, NextEra


raised its disbursement at an annualized


rate of about 13% from $3.93 a share to $5.


Last year, it was boosted to $5.60 a share,


or $1.40 following a stock split last fall.


The stock was recently yielding 1.6%,


about half the average for the sector.


But the stock is expensive, recently


trading at 37.6 times estimates 2021 profits.


“The valuation is pricey, but it is a great


company,” says John Bartlett, a portfolio


manager and analyst at Reaves Asset


Management. “The market’s not stupid.”


There have been a few exceptions for


utility dividends. One isDominion En-


ergy(D), which had to lower its dividend


last year after it divested itself of its storage


and gas-transmission assets, notably pipe-


lines, to Berkshire Hathaway Energy


for $9.7 billion.


Another isCenterPoint Energy


(CNP), a utility holding company that last


year ended up slashing its quarterly divi-


dend to 15 cents a share from 29 cents. The


company had a stake in a master limited


partnership that also cut its dividend.


CenterPoint Energy’s stock, which yields


3%, has a one-year return of minus 16%.


But as our screen found, there are a


number of utilities that have been boosting


their dividends by at least 6% annually


and often more:American Water Works


(AWK),Atmos Energy(ATO),CMS


Energy(CMS),DTE Energy(DTE),


andSempra Energy(SRE).


With dividend increases like that,


investors should consider utilities for


some downside protection.B


Such requirements would give investors


far more clarity, says Cheryl Smith, econo-


mist and portfolio manager at Trillium


Asset Management, because companies


would have to disclose ESG risks in securi-


ties filings and not just in “a glossy two-


page brochure with pictures of bunnies


and deer.”


The real challenge for the SEC “will be


to generate a set of intelligent disclosure


requirements that are also efficient” and


consistent with international standards,


says Joseph Grundfest, professor of law


and business at Stanford University and a


former SEC commissioner.


F


or companies with considerable cli-


mate risks, however, the required


disclosures may raise the cost of


capital as investors and ratings firms


digest the new data, analysts say.


That is a particular issue in the capital-


intensive energy industry, says Kevin


Book, managing director at ClearView


Energy Partners. “It takes a lot of money


going into the ground to get fossil fuels


out,” he says, and valuations in the sector


have only become more sensitive to the


cost of capital in recent years.


The SEC might also work to harmonize


the ESG terminology used by issuers as


well as by investment advisors, policy ex-


perts say. Issuers are “throwing out all


sorts of terms that aren’t consistent,” says


James Rich, a senior portfolio manager for


sustainable fixed-income strategy at Aegon


Asset Management, and regulators could


help standardize the definition of a “green


bond” or “sustainable” fund.


The Labor Department is also expected


to soften its stance on retirement plans’


use of ESG funds. A department rule last


year made it tougher for plans to include


these investments, but Biden has ordered a


review of any Trump-era rules that may


conflict with his administration’s environ-


mental goals. And while investors big and


small gain some powerful advocates at the


regulatory agencies, the financial-services


industry can look forward to stricter rules


and tougher enforcement.


Both the SEC and the Labor Depart-


ment are likely to put more emphasis on


mitigating conflicts of interest in invest-


ment advice, Morningstar’s Szapiro says.


For the SEC, that may mean rewriting


Regulation Best Interest, which governs


brokers’ recommendations to customers,


and attempts to raise their standards of


conduct—but the Commission is unlikely


to throw out the entire rule, he says.


The Labor Department, meanwhile,


might review rules governing advice on


rollovers from 401(k)s into individual re-


tirement accounts.B


INCOME INVESTING


Here Are 6 Utilities With


Fast-Growing Dividends


M


any utility stocks have re-


mained unloved through


much of the pandemic, their


attractive yields and reliable


dividends notwithstanding.


TheUtilities Select Sector SPDR


fund (ticker: XLU), a good proxy for


larger-cap businesses in that sector, has


a one-year return of about minus 6%,


versus plus 20% for the S&P 500 index.


Still, earnings, which help fuel divi-


dends, are holding up for most utilities.


And the utility stocks in the S&P 500


were recently yielding about 3.2%, com-


pared with around 1.5% for the broader


market.


The consensus FactSet 2021 earnings


estimate for the Utilities Select Sector SPDR


was recently $3.35 a share, down only 2%


from $3.42 nearly a year ago. The recent


estimate for the fund’s dividends per share


was $2.08, versus $2.21 a year ago.


So why have investors kept away?


Morningstar analyst Charles Fishman


says that utility stocks “were pretty pricey


going into the pandemic” and cites that as


“probably the main reason” for their un-


derperformance since. The Utilities Select


Sector SPDR fund recently fetched nearly


20 times its projected 2021 earnings, com-


pared with its five-year average of 18.3,


according to FactSet.


Still, in a Jan. 22 note, Fishman wrote


that he thought the utility sector was


fairly valued. “Growth investments in


renewable energy, grid modernization,


and electric vehicles should outweigh


higher regulatory, operational, and finan-


cial risk,” he observed, sizing up the re-


cent change in presidential administra-


tions. “We forecast that the U.S. utilities


we cover will invest $656 billion over the


next five years, more than consensus


expects and up from the $541 billion


spent in the past five years.”


In his view, that “supports our 5.5%


average annual industry earnings growth


By Lawrence C. Strauss


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