Some of the valuations we were seeing last year for speculative technology and e-commerce stocks yet to make a profit were extreme and reminiscent of the dotcom boom of the 1990s. The fall in the share price of these companies – and others once perceived to offer long-term secular growth – has been painful for investors.

But when a market corrects it can cause collateral damage to the share prices of a lot of companies with strong business models, generating attractive levels of free cashflow.

We have seen that this year, but if you are investing for the long term and looking for income, as we are, then this may be a good time to look for value in stocks exhibiting qualities typically seen in utilities.

Most people think of electricity, water and telecoms when they consider utility stocks. Their attraction is that they are essential to our wellbeing – these are the last bills we will stop paying when times are hard. And so the utility providers should be able to lift prices in line with inflation (regulators permitting).

You can take this concept of the utility and broaden it to include some of the best companies in the world today­.

Microsoft (MSFT.O) is a good example, in my view. It is now deeply embedded in workflows around the world. Good luck to the chief technology officer who suggests stripping Microsoft out of a large business and replacing it with other providers.

Years ago we each bought a Microsoft office suite CD and uploaded Word, Excel, Outlook and perhaps Publisher to our computers – we probably got the software with the machine. Companies bought licences for multiple users. But this left Microsoft vulnerable. Many people ripped off pirate copies, and in times of economic stress you could just delay buying the latest version of the software – Windows 97 (remember the annoying bouncy paper clip?), Windows Me or Windows XP.

Today, most of us have moved to a subscription model. It means we always have the latest version of the software, and that Microsoft has a constantly recurring income. It can pass on inflation costs because we have no option but to carry on paying. And it can therefore keep funding the research and development it needs to stay ahead of the competition.

The money generated by this subscription model has enabled Microsoft to develop Teams, allowing many of us to be productive through the pandemic, and to expand its cloud-computing business, Azure, which has grown by more than 25% per annum for the past five years. We believe it still has an attractive runway for growth in future. The more Microsoft embeds itself within the business world, the deeper the moats that surround it.

Relatively speaking, we like Microsoft even though it may still look expensive on around 26 times consensus earnings estimates for 2022 – the S&P 500 is on a multiple of nearer 16 times.

Telecoms infrastructure

Few can match Microsoft for profitability and scale, but there are other businesses with similar utility-like characteristics. One of our biggest holdings is American Tower (AMT.N). It owns the cellular towers that phone companies hang their satellite dishes on. It has around 221,000 sites across six continents. The phone companies secure tower space by paying a fee that is typically linked to inflation (and they in turn are good at passing on costs – we may delay upgrading our phones, but most of us cannot survive without the mobile service that makes them work).

The capital intensity and return on capital would be poor if the phone companies were to build their own towers for each dish, but the numbers are much more attractive – both for the tower provider and the renter – when three or four hang dishes off the same structure. American Tower therefore has very high levels of client retention and because maintenance costs are low, strong recurring income.

Universal Music

In the same way that we have stopped buying software, most of us have given up on music CDs. Streaming services such as Apple Music and Spotify are the toll roads of music consumption today. When we listen to a track the music rights owner receives a royalty coupon. The best music has a long lifespan. We might watch Downton Abbey a couple of times, but we are likely to listen to our favourite songs hundreds of times.

One company we like at the moment is Universal Music Group (0UMG). It covers recorded music, music publishing, merchandising and audiovisual content in more than 60 countries. It has a vast and broad range of artists signed up to it – Pavarotti, Frank Sinatra, Sam Smith, Eminem, Andrea Bocelli, the Jonas Brothers and lots more popular modern artists.

Modern technology means it can monetise its catalogue better than ever – and not just from streaming. UMG can now protect copyright more readily, picking up when music is being used for commercial purposes online and by broadcasters. Furthermore, the ongoing popularity of long-established artists has been underestimated, as the recent performance of octogenarian Paul McCartney at Glastonbury goes to show.

Although music is not as essential to life as water, electricity or mobile phones, music consumption will be one of the last outgoings many consumers cut back on, in my opinion.

Lift servicing

You can find companies with some utility-like characteristics in strange corners once you start to look. A final example is Finnish lift manufacturer Kone (HEL: KNEBV). There are only four major players in the lift and escalator industry – Otis, Schindler, Kone and Mitsubishi Electric. The share prices of all these companies have been weak over the last year as expectations of new lift installations have fallen.

These companies make the bulk of their profits not from installation but from the ongoing maintenance of equipment and spare parts. Once you have an elevator installed, you are not going to rip it out and install another if the maintenance costs are rising faster than the lift itself. And most owners of public buildings are mandated by regulation to have their equipment regularly serviced. As and when the market for new equipment improves, especially in China, that will be a bonus.

We cannot be complacent about these companies, as the past year has demonstrated. Most businesses are vulnerable to disruption, and companies with some utility-like characteristics may attract utility-like regulatory oversight. But in the current environment, where we have no certainty over whether share prices have hit the basement floor yet, I believe these companies with defensive, predictable earnings streams have some attraction.

Stephen Anness is head of global equities at Invesco and manager of the Invesco Select Trust’s Global Equity Income Share Portfolio (IVPG ) and the Global Income and Global Equity Income funds.

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