3 Utilities for Safe and Growing Dividends

As the S&P 500 has nearly doubled off its bottom last year, it has become especially challenging for income-oriented investors to identify stocks with attractive dividends and reasonable valuations. The utility sector has become interesting lately, as it has incurred a ~10% correction in the last month due to fears of higher inflation in the future as a result of the economy heating up. Some utilities have raised their dividends for over 25 years, and qualify on the Dividend Aristocrats list. Here, we will analyze the prospects of three utilities, which offer safe-and-growing dividends. Atmos Energy Atmos Energy distributes and stores natural gas in eight states, serving more than 3 million customers. It is headquartered in Texas and it is the largest pure-play natural gas distributor in the U.S. It generates 67% of its earnings from its distribution business and the remaining 33% from its pipeline & storage business. Atmos Energy has proved immune to the coronavirus crisis. Thanks to its dominant position and the regulated nature of its business, the utility is rock-solid even under the most adverse economic conditions. To be sure, it grew its earnings per share 8% last year, from $4.35 to an all-time high of $4.69. It is also on track to grow its EPS by another 9% this year, to a new all-time high of $5.10. Most investors have linked the natural gas business with high cyclicality. This is true for most natural gas companies but Atmos Energy is a bright exception. Thanks to the regulated nature of its business, which allows the company to hike its prices almost every year, the company has grown its EPS for nine consecutive years, at an 8.9% average annual rate over the last decade. Moreover, Atmos Energy has ample room for future growth. It can increase its customer count while it can also continue growing via meaningful acquisitions. In addition, it will continue to invest in the expansion of its infrastructure and thus it will receive approval for rate hikes from regulatory authorities. Overall, Atmos Energy is likely to grow its EPS by at least 6% per year on average over the next five years. The strongest competitive advantage of Atmos Energy lies in its wide distribution area and lack of direct competition for residential and commercial customers in its service areas. In addition, demand for natural gas is inelastic, as consumers do not cut their natural gas consumption even during the fiercest recessions. The record earnings of the utility last year are a testament to the essential nature of natural gas. Thanks to its rock-solid business model, Atmos Energy has raised its dividend for 37 consecutive years and hence it is a Dividend Aristocrat. The stock currently offers a 2.7% dividend yield. The company has raised its dividend at an 8.4% average annual rate over the last five years. This is far better than the 3.3% median growth rate of the utility sector. Given also the solid payout ratio of 49% of Atmos Energy and its healthy balance sheet, investors should rest assured that the company will continue growing its dividend at a meaningful rate for many more years. Consolidated Edison Consolidated Edison is a holding company that delivers electricity, natural gas, and steam to its customers in New York City and Westchester County. It is one of the largest public utilities in the U.S. Just like most utilities, Consolidated Edison has proved resilient to the pandemic. On the other hand, the company currently has lackluster business momentum. In the second quarter, its revenues grew 9% over the prior year's quarter but its adjusted EPS dipped 12%, to $0.53 from $0.60, as higher rates were more than offset by increased costs related to healthcare and heat events. The company is on track to grow its EPS by 2% this year. Consolidated Edison has grown its EPS at an average annual rate of only 1.8% over the last decade. This is a slow growth pace even for a utility stock. On the bright side, the company initiated the largest investment program in its history last year. It will install more than 5 million smart meters in its network until the end of 2022 for a total cost of $1.4 billion in order to help its customers optimize their energy use. As a result, Consolidated Edison will reduce its peak demand and hence it will cut its operating costs. Overall, it is reasonable to expect the company to grow its EPS at a 3.5% average annual rate over the next five years. Just like most utilities, thanks to its heavy investments in infrastructure, Consolidated Edison is allowed by the regulatory authorities to raise its rates. As a result, it enjoys reliable cash flows and can thus service its debt. It also has another competitive advantage, namely the inelastic demand for electricity and natural gas even during the fiercest recessions. Thanks to its consistent rate hikes and population growth, Consolidated Edison has raised its dividend for 47 consecutive years. Moreover, the stock is offering an attractive 4.0% dividend. Consolidated Edison should easily continue raising its dividend for many more years. On the other hand, given the modest growth pace of the company and its material debt load, it is prudent to expect slow dividend growth for the foreseeable future. NextEra Energy NextEra Energy is an electric utility with three operating segments, Florida Power & Light, NextEra Energy Resources and Gulf Power. Florida Power & Light and Gulf Power are rate-regulated electric utilities, which combined serve more than 11 million residents in Florida, while NextEra Energy Resources is the largest generator of wind and solar energy in the world. The company generates approximately 70% of its revenues from its electric utilities and the remainder from its renewable energy business. NextEra Energy is a superior utility stock in several aspects. In contrast to the vast majority of utility stocks, which are slow-growth and carry high amounts of debt, NextEra Energy has exciting growth prospects and one of the strongest balance sheets in its sector. It is also the only utility stock with a market capitalization above $100 billion ($153 billion). NextEra Energy has proved rock-solid during the coronavirus crisis. It posted record earnings last year and is on track for another record this year. In the second quarter, it grew its adjusted EPS by 9%, primarily thanks to its new growth projects, including the addition of 373 MW of solar generation commissioned during the quarter, as well as lower operating and maintenance costs. NextEra Energy has grown its EPS at an 8% average annual rate over the last decade. This is one of the highest growth rates in the utility sector. Even better, the company still has ample room for future growth. The primary growth drivers will be the strong backlog of the renewable energy business and the rate hikes of the regulated divisions. The company expects to grow its EPS by 6%-8% per year over the next two years. The most significant competitive advantage of NextEra Energy is its gigantic size, which results in great economies of scale in the renewable energy business. In addition, its focus on higher-growth renewable energy projects will allow the company to continue growing faster than its peers. NextEra Energy offers a dividend yield of 1.9%, which is below average among utilities. However, the low yield is primarily the result of the ~157% rally of the stock over the last five years. Plus, NextEra is a high dividend growth stock, as the company has grown its dividend at a 12.2% average annual rate over the last five years. Final Thoughts Now that the broader market has become fully valued, the utility sector offers some attractive candidates for the portfolios of income-oriented investors. The above three utilities offer safe and growing dividends. Consolidated Edison offers the highest current dividend yield but the least-promising growth prospects, whereas NextEra Energy offers the lowest current yield but the most promising growth prospects.

3 Utilities for Safe and Growing Dividends

With the broader market becoming more fully valued, the utility sector offers attractive candidates for income-oriented investors.

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