Warren Buffett Issues Stock Market Warning for Defensive Utility Sector

Warren Buffett has a warning about a corner of the stock market that’s long been seen as a haven for cautious investors: utilities.

Electric utility companies have long been viewed as a defensive sector by investors because they provide essential services that people continue to use regardless of economic conditions, making their revenues relatively stable even during downturns.

However, speaking at Berkshire Hathaway’s annual shareholder meeting over the weekend, Buffett said the electric utility sector is not as reliable as it used to be, and that investors need to adjust their expectations going forward.

Blame wildfires

Buffett said the growing risk of wildfires is the core reason investors need to be cautious on utilities.

“The public utility business is not as good a business as it was a couple of years ago,” Buffett said. “If anybody doesn’t believe that, they can look at Hawaiian Electric and look at Edison in the current wildfires situation in California.”

In August 2023, shares of Hawaiian Electric plunged as much as 76% as investors feared that the company could be held liable for the deadly Maui fires. Shares have yet to recover any of the losses.

California’s PG&E has also paid out billions of dollars after its equipment was found responsible for starting several wildfires between 2017 and 2021. The company filed for bankruptcy, and its stock price crashed as much as 95%.

More recently, shares of California-based Edison International plunged as much as 37% over fears that it could be held liable for the Palisades fire in Los Angeles at the beginning of 2025.

Berkshire Hathaway Energy’s value decline

Buffett admitted that Berkshire Hathaway isn’t immune to these risks, highlighting that the conglomerate’s Berkshire Energy utility business is declining in value.

“Berkshire Hathaway Energy is worth considerably less money than it was two years ago based on societal factors,” Buffett said.

Incoming Berkshire Hathaway CEO Greg Abel, who oversees the conglomerate’s energy operations, echoed the warning and highlighted the persistent risks the industry faces.

“There are no silver bullets,” Abel said. “But every day our teams across utilities are working hard to reduce that risk, recognizing the fundamental risk of the wildfires is not going away.”

Berkshire Hathaway Energy’s PacifiCorp utility business has faced the wildfire risk head-on after the 2020 Labor Day wildfires in Oregon. The company has already paid out more than $1 billion in settlements and faces claims in the tens of billions of dollars.

That’s not sustainable for a utility business that typically has a low rate of return.

“We can’t just become the insurer of last resort that’s going to cover any cost and all costs irrespective of what occurred,” Abel said. “That’s a little bit of the situation we’re in right now.”