The increase in electricity prices and operational costs of electric companies in the United States, especially in the current conditions where interest rates have reached their highest level in two decades, has created new concerns. With the rise in interest rates and capital costs, these expenses are likely to be passed on to consumers, which could lead to a decrease in return on investment for shareholders.
The Impact of Interest Rate Hikes on Investment
The return on investment of an electric company is divided into two main parts: 1) returns from risk-free investments such as U.S. Treasury bonds and 2) the additional amount added to compensate for the extra risks that shareholders undertake. Given the increase in interest rates, capital costs are also expected to rise. Currently, the risk-free return rate is about 5 percent, and according to the latest statistics, the average return on investment for stocks in the market is about 6 percent.
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Forecasting Changes in Return on Investment
Analyses show that in the past two years, major electric companies under the Edison Electric Institute have earned about 10 percent on their capital. This means they have earned above their average return on investment, which could put significant pressure on shareholders. Specifically, every one percent decrease in return on investment reduces dividends by 10 percent. This could lead to a decline in the stock value of electric companies in the market.
Currently, three main factors could lead to a decrease in the stock prices of these companies: 1) high percentage of investment in capital structure, 2) increase in return on investment, and 3) changes in economic conditions that create pressure on companies to reduce costs. These factors together could lead to significant changes in the stock market of these companies.
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