Tag Archives: utilities

Dividend Growth Stock Overview: New Jersey Resources Corporation

Summary New Jersey Resources provides natural gas services to over 500,000 customers in northern and central New Jersey. The company also has a growing wind and solar energy portfolio, currently totaling 147 MW of capacity. Over the last decade, the company has met its goal of compounding its dividend by 6-8% a year; the annual dividend growth rate has averaged 7.3%. New Jersey Resources has grown its dividend since 1995. The stock currently yields 3.2%. Among the areas that New Jersey Resources serves is the Jersey shore. Photo: New Jersey Resources Corporation’s 2014 Annual Report About New Jersey Resources Corporation New Jersey Resources Corporation (NYSE: NJR ) is an energy services holding company, whose primary business is the sale and distribution of natural gas to over 500,000 customers in the northern and central New Jersey. The company was formed in the early 1980s through the 1-for-1 exchange of New Jersey Natural Gas shares into the new holding corporation. In addition to the regulated natural gas business, New Jersey Resources offers other energy services to its customers and invests in midstream assets. The company’s operating area has a population of roughly 1.5 million people. (Note that one customer account usually serves more than one individual.) The company’s has four reporting business segments, which are organized roughly around its subsidiaries. The New Jersey Natural Gas Company subsidiary runs the natural gas distribution business segment, which is responsible for the regulated part of New Jersey Resources’ business: The distribution and sale of natural gas to retail customers. The Energy Services segment primarily consists of NJR Energy Services Company and is responsible for New Jersey Resources’ unregulated wholesale energy operations. The segment is also responsible for providing wholesale energy operations to other natural gas companies and energy producers. The Clean Energy Ventures segment is run by NJR Clean Energy Venture Corporation. This segment is responsible for investments in solar and onshore wind investments. This segment has a clean energy portfolio of more than 147 MW in electrical generation capacity. Finally, the Midstream segment is responsible for all of New Jersey Resources’ investments in natural gas transportation and storage facilities. NJR reports “net financial earnings” (NFE) as its primary profitability metric. NFE is the company’s earnings adjusted for commodity derivative and hedging contracts. For the 2015 fiscal year (which ended September 30, 2015), although New Jersey Resources earned $2.12 per share under generally accepted accounting principles, which was up 25% from 2014, NFE per share was $1.78, down 15.2% from 2014. New Jersey Resources seeks to increase NFE per share by 5-9% a year and the dividend 6-8% a year long term. With the current dividend of 96 cents, the payout ratio is 54%, below the company’s target range of 60-65%. Accounting for the company’s guidance of 2016 NFE per share of $1.55-$1.65, next year’s expected payout ratio is roughly 60%, before any increase. New Jersey Resources has an active share repurchase program and has repurchased 16.8 million shares since September 1996. In FY 2015, the company repurchased 348,200 shares. 2.7 million shares remain on the existing authorization, which represents 3.15% of the outstanding stock. The company is a member of the S&P 600 Small Cap and Russell 2000 indices and trades under the ticker symbol NJR. New Jersey Resources’ Dividend and Stock Split History (click to enlarge) New Jersey Resources has grown its dividend at 7.3% over the last 10 years. New Jersey Resources has paid dividends since at least 1988 and increased them since 1995. The company announces annual dividend increases in early-to-mid September, with the stock going ex-dividend about two weeks later. In September 2015, New Jersey Resources announced a 6.7% dividend increase to an annualized rate of 96 cents a share. The company should announce its 22nd consecutive annual dividend increase in September 2016. As noted above, New Jersey Resources aims to increase dividends by 6-8% a year, and targets a payout ratio of between 60% and 65%. The company has met its dividend growth target over the last decade – the 5-year and 10-year dividend growth rates are 6.15% and 7.29%. Over the last 20 years, the company has fallen short of the goal, with the dividend compounded at 5.16% annually. New Jersey Resources has split its stock three times since beginning its record of annual dividend increases. The company split its stock 3-for-2 in March 2002 and March 2008. Most recently, the company split its stock 2-for-1 in March 2015. Over the 5 years ending on June 30, 2015, New Jersey Resources’ stock appreciated at an annualized rate of 13.4%, from a split-adjusted $14.58 to $27.31. This underperformed the 15.0% compounded return of the S&P 500 index, the 17.2% return of the S&P Small Cap 600 index and the 15.7% return of the Russell 2000 index over the same period. New Jersey Resources’ Direct Purchase and Dividend Reinvestment Plans New Jersey Resources has both direct purchase and dividend reinvestment plans. You don’t need to be a current shareholder to participate in the plans – you can make your initial purchase in the plan. The minimum investment for the initial direct purchase is $100 and $25 for follow-on direct purchases. The dividend reinvestment plan allows for full or partial reinvestment of dividends. The company occasionally offers shares at up to a 3% discount through the direct purchase plan. The plan’s fee structures are favorable for investors. The company picks up the costs of buying shares through the both the direct purchase and dividend reinvestment plans. The only fees you pay through the plans are when you sell your shares. You’ll pay a commission of between $15 and $30, depending on the type of sell order, plus a transaction fee of 10 cents per share. You’ll also pay $5 to have the proceeds (net of any fees) directly deposited to your account. Helpful Links New Jersey Resources Corporation’s Investor Relations Website Current quote and financial summary for New Jersey Resources Corporation ( finviz.com ) Information on the direct purchase and dividend reinvestment plans for New Jersey Resources Corporation

Strong Fundamentals The Name Of The Game For Southern Company

Summary SO’s fundamentals strongly backed by its hefty capital investment plan. The company is utilizing available growth opportunities in the U.S. utility sector to keep earnings growing. SO is actively expanding its renewable energy generation portfolio. The stock is a good investment prospect for long-term income-seeking investors. Utility companies have a defensive business model because of consistent demand and regulated business exposure, which make revenues and cash flows highly certain. In the recent past, utility companies are incurring capital expenditures, which have been weighing on their earnings and cash flows. Utility companies are making capital expenditures to strengthen their power generation infrastructure to keep up with the gradually increasing electricity demand and keeping up with the changing environmental regulation. According to the EIA, electricity demand in the U.S. residential area will increase by 2.1% in the second half of 2015. The report also confirms 1.3% and 1.2% rises in commercial and industrial sales of U.S. utility companies in 2016. The bright outlook of the U.S. utility industry makes me bullish about Southern Company (NYSE: SO ), which is one of the largest utility companies in the U.S. The company serves both regulated and competitive markets across the U.S. SO is making its way in the U.S. utility industry by regularly investing heavily in expansion and the development of its renewable regulated asset base. Also, the stock maintains its attractiveness for income-hunting investors, as SO offers a yield of 4.8%. However, on the valuation front, anticipated production cost overruns at Kemper is making it trade at a discount to peers, which I think provides a good entry point for long-term investors. The company has been reporting healthy financial numbers, due to the strong backing of its large regulated asset base. The company registered an EPS of $1.17 in 3Q2015, an increase of $0.25 per share from EPS of the previous year’s same quarter. And for the nine months ending September 30th, the company’s EPS was $2.30, as compared to an EPS of $1.88 reported in the same period a year ago. The earnings growth momentum of SO is expected to remain strong in 4Q’15, which as per management’s estimates, will yield it a year-end EPS of $2.88 per share, at the high end of the previously given annual EPS guidance range of $2.76 to $2.88. I consider the company’s capital investment plan for the creation of a strong renewable energy generation base as a key driver of its future earnings growth. Recently, SO has announced that it will invest $2.3 billion this year, higher than its previous expectations of $1.4 billion. Although there are additional projects under consideration for 2016, its management still expects to spend around $1.3 billion during the year. Year to date in 2015, the company has announced around 12 new renewable energy-related projects, which will add 1,000MW capacity towards its existing renewable portfolio’s current capacity of 1,600MW. SO has been actively acquiring solar facilities to grow its portfolio of renewable energy generation. The company continued to develop itself as a solar success story by acquiring the 300MW Solar Gen2 and the 300MW Desert Stateline projects from First Solar (NASDAQ: FSLR ). The acquisition being in line with SO’s business strategy of expanding wholesale business in targeted markets through the acquisition and construction of new units, will bode well for SO’s earnings growth in the long run. Moreover, the company is right on track to become the second largest gas utility in the U.S. by merging with AGL Resources (NYSE: GAS ). The merger is waiting for regulatory approval, expected in the second half of 2016, after seeking a nod from AGL’s shareholders. Upside of this merger rests in strengthening SO’s status as the regional powerhouse in southern U.S. Moreover, given the size of GAS, I believe the probable GAS-SO merger will boost overall earnings growth of the company by approximately 4% to 5%. More importantly, SO’s future earnings growth will be driven by the settlement of its Vogtle nuclear power plant. By keeping the nuclear power plants schedule on time, in-service dates of two nuclear power plants are expected to be 2019 and 2020. Actually, customer rate impact for Vogtle unit 3 and unit 4 is expected to remain in the previously predicted range of 6% to 8% , which will affect the company’s future earnings and free cash flow growth positively. Speaking of its clean coal power plant ‘Kemper’, which has been repeatedly delayed in the past few quarters, has resulted in stock valuation contraction. The stock is trading at a forward P/E of 15.34x , in contrast to the utility industry’s forward P/E of 18.85x . The management expects that the project will be operational from the first half of 2016, but in early October, the Mississippi Public Utilities staff analyzed the Kemper project and said that there is hardly a 30% chance that the project will be completed by December 2016. Given the fact that the company’s management has estimated a $25 to $30 million incremental cost, if the project is delayed in the second half of 2016, I believe the Kemper project will remain an overhang on the stock price in the near term. However, once the project is completed, it will augur well for the stock valuation. Furthermore, SO has an attractive capital repayment plan, strongly backed by its cash flows. In the current low interest environment, its current dividend yield of 4.80% , with its strong free cash flow growth potentials, is well headed to ensuring a safe and sustainable future of income investors, and casts an impressive outlook of the stock. Summation The company has strong business fundamentals, which are strongly backed by its hefty capital investment plan. In its attempts to keep its earnings growing, SO is utilizing the available growth opportunities in the U.S. utility sector. And for this, the company is actively expanding its renewable energy generation portfolio, which being regulated, offers huge earnings growth potentials. Owing to the strong growth potentials of SO’s ongoing renewable energy generation projects, I expect to see uninterrupted growth on its earnings and cash flows in the long term, which I think will help its shareholders to be satisfied by consistently increasing dividends. Therefore, I think the stock is a good investment prospect for long-term income-seeking investors.

CenterPoint Energy: Consider This High Yield, Low Growth Utility

Summary I’ve written about several utility companies lately. They varied in growth and dividend yield. In one article, I said Southern Company should be avoided at the moment. In this article, I will write about investing in CenterPoint Energy, which I believe is a superior high yield, low growth utility. Introduction As I’ve written in several of my articles, I usually divide my dividend growth stocks in two ways. The first is by sector, which helps me diversify my portfolio. The second is by the state of the company. I then divide the companies into three types. The first is companies with low yield and high growth, the second is medium yield and medium growth, and the third is high yield and low growth. Sometimes you can find some bargains and get a high growth company for medium or even high yield, but usually the market knows how to price stocks. I’ve written about several utilities lately. These utilities were divided between these three groups. I wrote about ITC holdings (NYSE: ITC ) which has low yield and high growth; Wisconsin Energy (NYSE: WEC ) — my personal favorite — which has medium growth and medium yield; and Southern Company (NYSE: SO ), which has high yield and low growth. I also wrote in March about Avista (NYSE: AVA ), which also shows medium growth and medium yield. Retirees and older people look for the current yield, and therefore agree to accept the extremely low growth shown by some companies. In this article, I will analyze CenterPoint Energy (NYSE: CNP ), a company that has a higher yield than Southern Company and similar low growth. In my opinion, this company is more suitable for investors looking for current income. CenterPoint Energy is a public utility holding company. Through its subsidiaries it is engaged in the following business segments: Electric Transmission & Distribution, Natural Gas Distribution, Competitive Natural Gas Sales and Services and Other Operations. Fundamentals When I look at the past decade, CNP’s fundamentals seem pretty strong. However, as I will show here, they are not going to grow at the same pace in the future. For example, revenue actually declined from $9.7 billion in 2005 to $9.2 billion in 2014. This is an annual decline of 0.5% for the past decade. In the near future, both the company and analysts covering it believe that revenue will grow due to rate relief from the regulators as well as the growing number of customers. CNP Revenue (Annual) data by YCharts On the other hand, EPS has managed to show some significant growth. EPS grew from $0.75 in 2005 to $1.42 in 2014, which is a CAGR of over 6.5%. This is a decent number for a utility. However, the EPS for 2015 and 2016 will be much lower. The estimates for 2015 are between $1.05 and $1.1, and the company has reaffirmed its guidance for 4%-6% annual growth in EPS for 2015-2016. Basically we have a company that will probably show modest growth in both revenue and EPS for the next 3-5 years. CNP EPS Diluted (Annual) data by YCharts The dividend is probably the biggest reason to purchase this stock, as the EPS will grow slowly. The dividend has been raised every year over the past decade, and it grew from $0.38 in 2005 to $0.96 in 2014. This is a CAGR of almost 10%, which is much higher than the EPS growth. Due to that fact, the current payout ratio is 70% for the 2014 earnings, and over 90% for the mid point of the 2015 EPS guidance. Therefore, I believe that the future growth will be limited to less than the EPS growth, and I believe it will be in the range of 2.5%-4%. However, as the company is a utility, which is a regulated monopoly, the dividend is still sustainable. The current yield is really robust at 5.8%. CNP Dividend data by YCharts When I look at the fundamentals, I find that the growth will be slower in the future, but the yield is high enough to compensate income-oriented investors. I find it more attractive than Southern Company as the yield is higher, but the growth estimates are not lower. Valuation Valuation at the current price is pretty compelling, especially when compared to its peers. Due to the low growth, the company trades for a lower P/E than Wisconsin Energy or Avista. Their premium is explained by the higher growth. Currently, CNP trades for a P/E ratio of 15.62 for 2016, and 15.19 for 2017. This valuation is fair for a slowly growing company. CNP P/E Ratio (Forward 1y) data by YCharts In these two graphs, I compared the P/E ratio of CNP to the P/E ratio of SO. I made this comparison because both are diversified utilities that work in the southern part of the U.S. Both have high yield and low dividend growth going into the future. CNP has a much higher yield, and still the P/E is almost the same. I believe it is more attractive than Southern Company. Opportunities Regulation of utility companies can be an opportunity or a risk. At the moment, CNP states that current regulations are favorable to its ability to generate profits. In addition, in the past several months the company has asked for rate relief in a number of states, and regulators granted many of them. In the table below, you can see some of the granted requests. Some are still under examination by regulators, and will be determined shortly. This relief allows the company to increase its revenue and margins. The rate relief accounts for almost $300 million annually, and I believe it alone can push up revenue by 2% before inflation. This way, we can achieve growth of 3%-4% just by increasing the prices annually, and over 50% of it will come from the rate relief. Together with cost cutting efforts, the rate relief will not only increase revenues, but also profit margins and EPS. The goal is to reach double-digit profit margins, and it will take more price increases, as the current profit margin is almost zero. Another opportunity the company’s business segment and geographic diversification. It operates in several states, which means it has no exposure to a single regulator, diminishing its regulatory risk and giving it an advantage over its peers in that regard. Its revenues are divided equally between three segments: electric transmission, gas distribution and energy services. In addition, the company is a major holder of Enable Midstream Partners (NYSE: ENBL ), a joint venture with two of its peers — GE Energy and ArcLight Capital Partners. The entity is considered an MLP. It’s relatively not leveraged and has several growth prospects. It is a great opportunity for CNP to keep growing. When energy prices recover, MLPs’ prices will rise along with their profitability. This offers potential upside for CNP investors as an energy recovery play. When I said that Wisconsin Energy is a better investment than Southern Company, I was told to look at the area where the companies operate. WEC is in the rust belt, while SO is in the growing south. CNP operates mainly in the growing south, just like SO. Its primary customers are in the area around Houston, Texas, and the company dedicated an entire slide in its Q3 presentation to show that it operates in a quickly growing area. This gives CNP the ability to grow organically in the future. Houston is a huge opportunity for many reasons. First, it is one of the fastest-growing cities in the U.S., according to Forbes. Moreover, according to the Texas State Demographer, Houston’s population is set to keep growing in the next 35 years, mainly due to immigration. Houston is a great opportunity, as it is much more than the center of energy companies it used to be. Over 1500 corporations have relocated to Houston over the last 5 years, and it is becoming a base for medical companies and financial companies as well. All of these people and businesses will need both electricity and gas, and CNP will supply it. Risks The company still presents risks for investors. The first is its balance sheet. CNP is using a lot of debt. I believe that the debt load is manageable, and the company is aware of the associated risk. However, imminent interest rate hikes will make this debt more expensive. I must add that although any rise in interest rates is forecast to be slow, at CNP’s current debt to equity ratio, which is higher than 2, its fragile A1 credit rating may still be in jeopardy. CNP’s cash on hand decreased by almost 30% this year, and the credit rating agencies warned that its narrowing liquidity puts its credit rating at risk. When interest rates rise, more expensive debt may put this leveraged company in a very uncomfortable position, which will force it to cut the dividend. The company should maintain more than $100 million in cash, and it currently has around $225 million. The company is forecast to show very modest EPS growth in the medium term. This can easily mean a dividend freeze, and at the current dividend payout ratio, it will be very hard for the company to raise its distribution. In addition, the favorable regulatory environment mentioned above can always change. One regulatory change by a major state or by the federal government can result in damage to CNP’s income. With a payout ratio of 92%, that may cause a dividend cut. However, this risk is not too great, as the southern states where CNP operates tend to have favorable regulation for enterprises. The company should be very cautious in the short term to make sure that its dividend is sustainable. The combination of the growing dividend with rising interest rates and the current payout ratio could become a problem if management isn’t careful. The company does not produce electricity. It allows the producers to use its infrastructure to deliver electricity to its customers. These companies can create their own transmission network or use a competitor’s transmission network if they feel CNP’s prices are too high. However, this risk is mitigated by the fact the infrastructure request a lot of capital invested, which gives CNP a bit of a moat. Conclusion CNP is currently a solid business. It has almost no room for error in the medium term, but can still offer a better income than its peers. Of course, a dividend freeze is a very real concern if the company cannot grow EPS at the pace of the guidance. However, the MLP business can offer interesting upside in the future. At 25 years old, an investment that grows pretty slowly is not for me. I try to look for dividend growth stocks that can show medium to high growth, even if it comes at the expense of current income. Retirees and older investors should consider CNP, however, as its 5.8% yield is quite attractive for current income seekers.