I'm Watching PG&E Closely, but Here's Why I Haven't Bought the Dip

As a Californian, I can say this: If there are two industries that residents of the Golden State really don't like, it's insurance providers and utilities.

Interestingly, with the state considering wildfire reform legislation, those industries are at odds with one another. That's material for investors considering stocks such as PG&E (NYSE: PCG). The company known to California customers as Pacific Gas & Electric is one of the four major investor-owned utilities in the state, and due to the state having some of the highest utility rates in the U.S., PG&E and friends don't have a lot of fans in the state.

PG&E stock is fraught with risk due to changes in a California bill. Image source: Getty Images.

Of course, investing isn't a popularity contest. There are plenty of stocks that are often vilified in the court of public opinion that also deliver compelling returns. This year, oil equities certainly check that box. But the biggest risk to prospective PG&E investors isn't how Californians feel about the utility. It's the goings-on in Sacramento.

Wildfire bill makes PG&E a risky bet

For those who are new to utility stocks, the primary reasons investors have embraced this sector over the years are above-average dividend yields, below-average risk profiles, and, more recently, inroads to the artificial intelligence (AI) trade.

There are plenty of utility stocks that can be considered "sleepy" or "low risk," but those operating in California, including PG&E, don't qualify. In late August, the California State Assembly altered Senate Bill 492 (SB 492) to exclude protections proposed by Governor Gavin Newsom that would've made it burdensome for insurance companies to sue utilities due to wildfire claims. Shares of PG&E plunged 18% on the first day of trading after the news was revealed.

Over the past month, shares of PG&E shed more than a quarter of their value, a loss that's more than triple that of the largest utility exchange-traded fund (ETF). Sure, a stock moving that much in just a month may attract dip buyers, but rushing to buy the PG&E dip could prove perilous given the changes under SB 492.

The company itself acknowledges that, in its current state, the bill "does not adequately address" wildfire financing risks, adding that "it falls short" in fostering the "long-term durability" needed to drive investment and keep a lid on customer costs.

Credit clues

There's an old saying among corporate bond traders that "credit leads equity," implying that, in some cases, a company's debt can provide clues about upcoming moves in its stock. It's not foolproof thinking, and I'm not saying PG&E is distressed, but there are some credit clues worth monitoring.

In the wake of the SB 492 controversy, Fitch Ratings lowered its outlook on PG&E to "negative" from "stable." Although the ratings agency affirmed its BBB- rating on PG&E's debt, the lowest investment grade, it overtly acknowledged that California's legislative and regulatory climates have become "somewhat more challenging from a credit perspective in recent years."

So buyers of the PG&E dip need likely one, if not both, of the political or regulatory tides to turn in the company's favor. That probably won't happen soon, making this pullback one that's too tough to embrace.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.