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Why Warren Buffett Isn’t a Fan of Traditional Utilities

It’s not a mystery that Warren Buffett isn’t the biggest fan of traditional utilities. While they’ve been known as safe investments that pay a bountiful dividend, they are usually very slow growing and could have their long-term profitability in jeopardy.

Warren Buffett has made it clear that he believes there is a huge risk facing electric utilities right now, and that’s why he’s been investing more of his money into renewable energy. If you’re an income investor, then you’ve probably got large exposure to the utilities.

Is it time to reduce your exposure and put some renewable energy stocks in your portfolio?

Warren Buffett believes that renewable energy and efficiency are going to push traditional utilities beyond their “sloppy” operations as competition heats up in the space. Buffett stated that “the business of electricity is entering a period of uncertainty.” I believe this is true, especially considering the fact that consumers are already starting to go with third-party alternatives like the powerwall introduced by Tesla Motors Inc. (NASDAQ:TSLA).

Homeowners are able to go completely off the grid right now if they have solar panels installed on their rooftops. The energy is stored in the powerwall and used whenever the homeowner wishes.

Elon Musk stated that when the powerwall becomes cheaper and more efficient, traditional utilities could lose up to a third of their business. If you’re a shareholder in a utility company, then this has got to have you worried.

While I don’t believe Tesla’s powerwall will steal a third of the utilities market share overnight, I do believe that the powerwall, as well as many other alternative energy sources, will hurt the long-term profitability of utilities. This will affect the dividend payout as well as future growth for names like Fortis Inc. (TSX:FTS)(NYSE:FTS), which has been a fast grower given that it’s in a slow-growing industry.

Warren Buffett knows that the utility business is undergoing a huge change, and he’s bullish on renewables. Does this mean you should sell all of your utility stocks and buy into names like Tesla? Definitely not, but it can’t hurt to rethink your long-term investment strategy and start incorporating some exposure to renewables in the place of your utility stocks if you’re overexposed to the sector.

Utilities are usually a go-to pick for retirees. They’re very predictable and have less volatility than any other stock. This is all about to change, but don’t worry. This transition will most likely take many years, and there’s more than enough time to rebalance your portfolio.

Going forward, I expect utility stocks to continue to pay their attractive yields. But as their market share gets withered away by new third-party entrants, we may see a gradual decline in the stock price of many popular utilities over the next five years. For these reasons, I don’t own any utilities. There are just too many long-term headwinds right now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any stocks mentioned. David Gardner owns shares of Tesla Motors. Tom Gardner owns shares of Tesla Motors. The Motley Fool owns shares of Tesla Motors. Tesla Motors is a recommendation of Stock Advisor Canada.

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