Plug Into a Dependable 5.0% Dividend Yield

In the last year energy companies have been on a roller-coaster ride, with commodity prices falling materially amidst the COVID-19 pandemic. However, not all energy companies are the same. Despite having energy in its name, OGE Energy has been insulated from the pandemic in two ways: by owning a regulated utility and owning a portion of a midstream pipeline. This has allowed the company to post consistent results and keep increasing its dividend. Overall, OGE is a high-dividend stock yielding 5% with growth potential. Business Overview Headquartered in Oklahoma City, OK and tracing its roots back to 1902, OGE Energy is the parent company of Oklahoma Gas and Electric company (OG&E), which is a regulated electric utility. OG&E has more than 7,000 MW of electric generation capacity fueled by natural gas, low-sulfur coal, wind and solar, serving more than 863,000 customers in Oklahoma and western Arkansas. OGE Energy also holds a 25.5% limited partner interest and 50% general partner interest in Enable Midstream Partners L.P. . On Feb. 16, OGE Energy announced that Enable Midstream Partners L.P. would be acquired by Energy Transfer L.P. . After the transaction, OGE Energy will own approximately 3% of Energy Transfer and the company will also receive $35 million in cash consideration. Over time OGE Energy intends on exiting its midstream investment and become a pure play utility. On Feb. 25 OGE Energy announced fourth-quarter and full-year 2020 results for the period ending Dec. 31, 2020. For the quarter operating revenue equaled $485.4 million compared to $472.5 million in Q4 2019. Earnings per share equaled $0.27 versus $0.18 in 2019. For the year OGE Energy generated $2.122 billion in operating revenue, down from $2.232 billion in 2019. OGE Energy actually posted a net loss for 2020, but this was due to an impairment charge in its midstream investment. On an adjusted basis, EPS equaled $2.08 versus $2.16 in 2019. OGE Energy also provided a 2021 outlook. For this year the company anticipates EPS of $1.76 to $1.86 in its utility business. Adding in its midstream investment, we are expecting $2.17 in EPS this year. Growth Prospects In the 2011 through 2020 period OGE Energy grew its EPS by an average compound rate of 2.1% per year. While results were relatively consistent during this time, the company did not see significant growth due to declining revenue and a share count that rose slightly. Looking forward we anticipate a higher growth rate, as OGE Energy has invested $3.3 billion in growth projects over the last five years. In addition, continued economic improvement in the company's service areas should provide a long-term tailwind. Management is targeting a 5% utility growth rate over the intermediate term, which is the same number that we are using for our forecast. If EPS were to grow by 5% per year for the next half decade, you would anticipate the company earning $2.77 or so after five years. Recession Performance As a regulated utility, OGE Energy enjoys a wide economic moat in its service areas. Potential competitors face high barriers to entry including large upfront capital requirements and regulations. The midstream segment possesses similar characteristics, although this portion of the business will be divested over time. During the financial crisis, OGE Energy posted EPS of $1.32, $1.25, $1.33 and $1.50 over the 2007 through 2010 stretch: highlighting the recession resistance performance. Moreover, the dividend kept rising during this time as well. In 2020 earnings dipped slightly but still held up, falling by just 4%. Dividend Safety OGE Energy has not only paid but also increased its dividend for 14 consecutive years. The current dividend sits at $0.4025 per quarter or $1.61 on an annualized basis. Based on $2.17 in anticipated earnings, the current payout ratio equals ~74%. In 2011 OGE Energy was paying out ~$0.75 in annual dividends and earning ~$1.73, for a payout ratio of just ~43%. Since that time the dividend has increased by an average compound rate of 8.9% per year. As EPS grew by just 2.1% annually, this is why the payout ratio has moved up dramatically in the last decade. Moving forward we would anticipate dividend growth to be roughly in line with EPS growth -- you can only increase the payout ratio for so long. However, despite a lowered dividend growth expectation, the payout should remain well covered; especially considering the underlying business. Valuation/Expected Return Based on a current share price near $32, a $1.61 annual dividend and $2.17 in expected EPS this year, OGE Energy is presently trading hands with a 5.0% dividend yield, a 14.7 P/E ratio and a ~74% payout ratio. As noted above, if EPS were to grow by 5% annually, you would expect OGE Energy to earn $2.77 per share or thereabouts in the next five years. Over the past decade shares of OGE Energy have traded with an average price-to-earnings (P/E) ratio of 16.9. If shares were to trade at that mark again, this would imply the potential for a future share price of just under ~$47. If the dividend were to also grow by 5% per year, keeping the payout ratio the same, you would anticipate collecting just over ~$9 per share in cash payments during the next five years. When combined with the potential share price, this implies the potential for a total value of ~$56; keeping in mind that this is simply one possibility out of many. When compared to the current share price near $32, this works out to the possibility for ~12% annualized returns. Even if some of these assumptions are too ambitious, potential returns could still be in the high single-digits. Final Thoughts OGE Energy is a consistent company that is becoming even more of a pure-play utility. In the past the earnings growth rate was slow, but the dividend growth rate was quite impressive. Looking forward, the dividend growth rate may slow, but investors could still expect increased payments. Moreover, the 5% starting yield and possibility of double-digit returns adds to the investment thesis. OGE Energy appears to be offering a variety of attractive and dependable attributes.

Plug Into a Dependable 5.0% Dividend Yield

Becoming more a pure-play utility, this name produces consistent results and keeps increasing its dividend.

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