Warren Buffett warns of increasing risks for regulated utility companies

Warren Buffett, known as the Oracle of Omaha, has once again spoken out, drawing the attention of investors. With Berkshire Hathaway, Buffett has achieved remarkable success over the decades, but his recent assessments shed new light on the energy sector, which has traditionally been considered a reliable source of income. In his current annual report, Buffett expresses concerns about the rising risks for regulated utilities. He describes a changing regulatory landscape in some U.S. states, which has led to broken profitability pacts and potential bankruptcies in this sector. This uncertainty makes it difficult to predict both returns and asset values in this once-stable industry. Despite these challenges, Buffett emphasizes the advantages of the regulated model, which offers utility monopolies in exchange for government-approved rates and capital investments. This structure has provided slow but steady growth over time. However, climate change is now causing additional concern. Buffett pointed to utility companies like Pacific Gas and Electric and Hawaiian Electric, which have been more heavily burdened by wildfire-related costs. Similar risks could also affect other companies. For investors, the question arises on how to respond to these developments. Buffett suggests that while Berkshire Hathaway can withstand financial surprises, it will not consciously throw good money after bad money. A reduction in investments in the utility sector seems inevitable. This presents a dilemma for many investors: utilities are considered reliable high-yield stocks, offering stable income streams and often growing dividends. Despite the tougher conditions, many leading utilities predict strong growth. For instance, NextEra Energy expects annual earnings growth of 6 to 8 percent, likely supporting a dividend growth of 10 percent. WEC Energy is also adapting with an anticipated earnings increase of 6.5 to 7 percent. The rising demand for electricity, driven by population growth and new technologies like electric vehicles and data centers, creates additional growth opportunities. Buffett himself highlights that America's electricity needs and the associated investments will be enormous. The conclusion: Despite new risks, the utility sector remains attractive, especially for income-oriented investors. The monopolies, coupled with the growing demand for electricity, continue to offer prospects. However, investors should keep an eye on the responsibilities and regulatory challenges Buffett has mentioned.