Utilities – Boring is beautiful

If you were ever to give a team of decent software developers a brain scan, you’d see them all have “Boring is Beautiful” etched into their frontal lobes.

It’s an industry reminder that the most exciting, complicated and impressive lines of code aren’t, well, good. Simple, reliable and repeatable gets the best outcomes.

Investors often ignore the boring – they’re hooked on looking for “the next big thing”. The internet in the 1990s, gold and railroads in the 1800s, the South Seas in the 1700s and tulips in the 1600s. The endless opportunity and the potential for extraordinary share price growth can be tantalizing for all involved. But boring can be beautiful in investment too…

Last quarter, Ben mentioned that certain “sectors” display distinct characteristics, meaning they can behave in reliable(ish) ways during the ebbs and flows of economic cycles. And one of the sectors that we like is often defined by its boring nature. The utility sector.

But – as with coding – boring isn’t necessarily a bad thing! Periods of market volatility or geopolitical uncertainty or technological change often breed an environment of confusion. Not knowing where to invest, or what to invest in, often leads to poor investment outcomes. Flustered investors move to cash, or exclude entire regions, or frantically buy something they haven’t researched. It’s at these times where boring becomes beautiful. Stability becomes prized, and comfort is king.

Utilities do just this. They keep the world moving, providing the essential services: electricity, water or natural gas, that are key to servicing, well, everything. And this is the crux of why utilities are so stable in times of uncertainty. Their services are not optional; consumers and businesses will continue to use electricity and water, regardless of the economic environment. Even during a recession, people pay their utilities bills.

Keeping the world supplied with essentials means that businesses within the sector usually have stable and reliable revenue streams. In a good economic growth environment, this gets dismissed as dull. But when things get dicey? Bring on the boring.

However, the sector isn’t entirely without excitement. AI is quickly becoming an emerging source of productivity and economic growth (or at least of a lot of adverts promising that). And although most providers would have you believe that AI runs on data, really, it runs on electricity.

Already, data centres are using as much electricity as the whole of France. By 2030, that will be as much as the 1.4 billion people in India (third-largest electricity user). And of course, it’s not just the amount of power, it’s the transmission too. The fabled “grid” is also the domain of utilities providers. And, unlike most industries the big tech companies encounter, they can’t just do it themselves. Engineering a power grid is a little different from launching a new app. It requires centuries of infrastructure development, government regulation, and seriously high barriers to entry.

So, for once they outsource. This is the beauty in the boring of the utilities sector. It is such a large cog in the wheel of the world that the companies are often localised monopolies. Single companies within the sector are given the exclusive rights to provide a specific service or product that the government believes is key to the day to day running of an economy.

Utilities may not offer the thrill of the tenfold overnight return, or the buzz of building the digital future. But they bring something far more valuable to a diversified portfolio: dependability.

Investing isn’t always about finding the next big winner but finding the right areas of the market for the right periods of the economic cycle. Utilities, right now, look pretty good to us. A stable business model, with a lot of demand coming down the track, with nowhere else to go.

Sometimes, boring really is beautiful.

Constellation Energy

Constellation Energy is a US-based energy supplier, but its specialty lies in being the largest operator of nuclear power plants in the US, and more notably, the largest non-governmental operator of nuclear power plants in the world. This makes it a perfect partner for the likes of Microsoft. As a big name in the AI boom, it has seen its global emissions skyrocket (+23.4% in 2024) as a result of its mounting energy requirements from its AI and cloud computing operations. To meet the demand, Microsoft needs a reliable and dedicated source of power – if it’s low emission as well, so much the better. But for all the technical brilliance of Microsoft’s engineers and MBAs, they don’t do power. So they outsource. Constellation Energy and Microsoft have joined forces in re-launching the Three Mile Island nuclear reactor to fuel the AI demand it is expecting to achieve in the coming years

Sources

International Energy Agency; Organization of the Petroleum Exporting Countries 
https://datacentremagazine.com/critical-environments/microsoft-constellation-restarting-a-nuclear-reactor