Retirees: Get Plugged Into This Dividend Stock

If you're retired -- or ready to -- you should be particularly careful about how you invest. Why? The safety of a dividend stock's payout can become paramount. The good news is that certain sectors, such as utilities, offer many blue-chip stocks for investors interested in payouts that they can rely upon year after year. Evergy, Inc. is a blue-chip stock with a high yield of 3.5%, a recession-resistant business model, and a long outlook of dividend growth ahead. Lot's of Evergy Evergy is a regional electric utility that is headquartered in Missouri, and serves customers in its home state, as well as neighboring Kansas. The company generates electricity with coal, hydroelectric, landfill gas, uranium, oil, natural gas, solar, wind, and other renewable sources. This diversification in power supply has afforded Evergy the ability to grow to more than 10,000 circuit miles of transmission lines, about 40,000 circuit miles of overhead distribution lines, and around 13,000 circuit miles of underground distribution lines. Evergy serves about 1.6 million customers, and is the combination of a 2018 merger between the former KCP&L and Westar Energy businesses. Today, Evergy generates about $5 billion in annual revenue and trades with a market capitalization near $14 billion. Evergy reported its fourth quarter and full-year earnings in February, showing results coming in strong, considering the conditions that persisted during the year. Revenue was down 2% for the year, as lower demand from both residential and commercial customers weighed on results. Many of Evergy's commercial customers were shut down for part of the year, meaning they didn't use the same amount of power they otherwise would have. And the residential segment saw lower demand due to milder weather that didn't require the same level of heating and cooling. Earnings per share for the year came to $3.19, up from $2.89 in the prior year. The 7% gain in EPS is in line with the company's target of 6% to 8% annual growth through 2024. Evergy issued 2021 guidance of 6.5% growth at the midpoint of the range of $3.20 to $3.40 in EPS. Our initial estimate is for $3.32 in EPS for 2021, which assumes a return to normalized conditions. Growth Down the Line Evergy has managed to grow its EPS by nearly 5% annually over the past decade, which is quite good for a utility; utilities are generally more oriented toward stability, rather than growth. Evergy, however, is growing more quickly than that now, as it is in the early stages of its $9 billion-plus capital expenditure plan that runs from this year through 2025. In addition, Evergy is working on reducing operating and maintenance expenses. Indeed, non-fuel operating and maintenance expenses fell 10% year-over-year in 2020, and Evergy expects them to continue falling through at least 2024, when it expects a cumulative 8% reduction from 2020 levels. Evergy also has a revenue tailwind of 5% to 6% annually in expected base rate growth with its traditional utility business. It is also investing heavily in renewable power sources, which carry with them outsized growth rates compared to traditional power sources such as nuclear and coal. Finally, Evergy has been reducing its float via share repurchases, which accounted for 16 cents of EPS growth in 2020. We expect the company's somewhat conservative dividend policy to afford it the ability to continue to buy back shares and thereby boost earnings-per-share over time. In addition, the company's dividend growth rate has been equal to EPS expansion at nearly 5% annually. Again, Evergy is outperforming that today and we expect 7% annual dividend growth through 2026. Well Insulated Dividend Management has stated it expects to maintain the payout ratio in the area of 60% to 70% of earnings until at least 2024. Today, the payout ratio is right in the middle of that range at 65%. That implies the dividend will grow commensurately with earnings over time, which is why we expect the same 7% growth rate for both earnings and the dividend. Evergy's 16-year streak of dividend increases hasn't pushed the dividend to the point where dividend safety has become an issue, and we do not expect that to be the case for the foreseeable future. The company's robust earnings profile means it can raise the dividend each year without undue stress on its financials. Indeed, we think Evergy's dividend is in a sweet spot where it can return the majority of its earnings to shareholders, while also saving enough for its ambitious capital expenditure plan and share repurchases. We see total expected returns for Evergy at just over 10% annually in the coming years, which puts the stock firmly into buy territory. Evergy's expected growth rate of 7% provides most of the total expected return, and this is where the company sets itself apart from other electric utilities. In addition, the current dividend yield is quite strong at 3.5%, which is more than double the broader market, as measured by the S&P 500. The valuation is a non-factor in the expected returns -- Evergy trades for 18.3 times this year's expected EPS. That is nearly exactly in line with our fair value estimate of 18.2 times earnings. Overall, we expect to see double-digit annual returns over the next five years for the Missouri-based electricity provider. Furthermore, Evergy offers investors what we believe is a dependable payout at just 65% of earnings for this year. Management has demonstrated the ability to reliably predict earnings potential, and set the dividend accordingly over the years, never exceeding 70% of earnings in any given year. That leaves plenty of room for Evergy, in case of a temporary downturn in earnings.

Retirees: Get Plugged Into This Dividend Stock

Evergy is a high yield utility stock offering dependable dividends.

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