2) Utilities are a "safe" play.
They are safe, if by "safe" you mean the companies will not go bust, and their dividends are relatively safe. They do try to increase their dividends; most utilities are growing dividends 5 percent or so a year.
But if by "safe" you mean "these stocks are unlikely to go down," well, now you're in different territory.
For these stocks to keep going up, you have to make two assumptions:
a) that rates will keep moving lower, and
b) that investors will keep fleeing the broader market.
I've already noted that you are taking a risk assuming that rates will keep going lower. But I think you are also taking a risk assuming that investors will just keep fleeing everything else and piling into utilities.
That's because the belief that utilities will keep outperforming through a down market is, well, historically suspect as well. A hedge fund friend of mine who has been trading utilities and energy stocks for years had this to say: "One of the things we have observed by studying these stocks across several different bear markets is that they provide protection only in the early stages of the bear, but have never really been good preservers of capital by the time the bear is done wreaking havoc. So it can indeed be dangerous to overstay one's welcome in these names and we have been harvesting our longs in the space for that reason."
3) M&A activity is heating up.
There is some truth to this, but because there is so little to acquire it likely won't last long.
There are three parts to the utility business: power generation (gas, nuclear, coal), transmission (the long-distance wires), and distribution (getting the juice into homes). The trend in recent years is for the big integrated power companies like Duke, Southern, Eversource and Dominion to own everything: transmission, distribution and power generation.
So these integrated companies have been buying things recently to round out their portfolios. Today, Fortis, a Canadian utility, bought ITC Holdings, which owns transmission lines. And many utilities have been snapping up gas distributors. Southern Company bought gas distributor AGL Resources, Duke Energy bought Piedmont Natural Gas.
Why gas distributors? Gas is a simple business. Dry gas goes through pipelines, it's much less capital intensive than power generation. You don't have to run a power plant. There's an installed base of customers.
But this won't last: there's just not much left to buy.
That leaves me with my last problem with utilities: these stocks are expensive by historic standards. P/E valuations for many names are at or near historical highs, with most trading north of 20. For a utility?
So you have an industry with: little or no growth, historically high valuations, and extreme sensitivity to changes in interest rates.
Look, I get how these are being sold. You can hear the pitch from Wall Street to worried investors: "Look, Mrs. Smith, utilities are a monopoly. You get a dividend of 3 or 4 percent, and it never goes down. The companies won't go under — it's the gas company, for cryin' out loud! So you start with a dividend of about 3 percent, and most of these companies have earnings growth of 5 percent a year, so it's fair to assume you get yearly returns of 8 percent, relatively risk-free."
What could go wrong?