This No. 2 Top Dividend Pick for 2022 Shows Great 'Utility'

Amid this tumultuous beginning to 2022, we believe great opportunities can be found in dividend blue chip stocks. Here, we'll explain why we see UGI Corp. as Top Pick for the rest of the year. Founded in 1882, UGI is a utility company that stores, transports, and markets energy products and services, primarily in the U.S. It operates four segments: AmeriGas Propane, UGI International, Midstream & Marketing, and UGI Utilities. Through these segments, UGI distributes propane to 1.4 million residential, commercial, industrial, agricultural, and wholesale customers through 1,600 distribution points. UGI also distributes liquified petroleum gases, or LPG, to residential and commercial customers, and has a small natural gas distribution business. The company also has 2,600 miles of electric power lines, and 14 substations, so it is a highly diversified utility business, although its focus is certainly on propane. The company is expected to produce around $8.3 billion in revenue this year, and trades with a market capitalization of $7.5 billion. UGI is also a very strong dividend stock, having boosted its payout for 34 consecutive years. In addition, the company has paid dividends to shareholders for more than 130 consecutive years. While dividend longevity is somewhat expected for utilities, UGI still stands apart with its very long dividend increase streak. In addition, over the past decade, the company's average annual increase is almost 7%, so UGI has been good from a dividend growth perspective, as well. Growth Flow UGI's growth has proven to be outstanding, particularly for a utility. It has averaged about 10% annually for the past decade. In addition, it has had just one year in the past 10 in which earnings were down year-over-year, helping allow UGI to raise its dividend and produce a higher share price. We see 6.8% annual growth in the years ahead, which is below the historical average, but we think 10% growth will be difficult to replicate. UGI has also been an acquirer of growth, and we expect that to continue. In addition, it grows on an organic basis through higher usage and base rate increases, and we think the combination of those factors should see UGI with meaningfully higher earnings-per-share in the years to come. We note that weather can play a significant role in UGI's earnings, because the critical heating season each winter requires customers to use propane and other forms of energy for UGI to produce earnings growth. That's the biggest risk to UGI's earnings over time, rather than the typical risk of recession. UGI is quite resilient to recessions, because the vast majority of its revenue is derived from non-discretionary usage, but it is certainly beholden to the weather. Competitive Advantages UGI, like other utilities, lacks true differentiation in its business. But we like UGI for its diversification, wherein it provides various types of energy and services rather than just focusing on one, which is more typical for regional utilities. UGI's diversification helps with its inherent leverage to temperatures over its service area. Expected Returns UGI's expected returns are outstanding, given the sizable selloff the stock has experienced in the past several months. Shares have declined more than 20% so far in 2022, and that means the valuation of the stock has improved significantly. We note that earnings estimates haven't followed suit, so we see the potential expected returns as much higher than they would otherwise be. Shares trade for just 12-times earnings today, which is well below our estimate of fair value at 15.5 times earnings. That means UGI is trading for just 78% of fair value at the moment, and that will help with total returns in the years to come. In fact, we expect the tailwind from the valuation alone to add about 5% to total annual shareholder returns, in addition to earnings growth and the dividend. We noted 6.8% expected earnings growth earlier, and the current dividend yield is 3.7%, so in total, we see nearly 15% total annual returns from UGI. That puts it firmly into 'buy' territory, particularly considering its dividend longevity. UGI's 3.7% yield is not only about three times that of the S&P 500, but it is also very safe. The expected payout ratio for this year is just 45%, meaning UGI has ample room for earnings declines and still be able to pay -- and indeed raise -- its dividend. Thus, UGI offers not only outstanding prospective total returns, but it is a truly strong income stock, as well. We find the decline in UGI shares in 2022 to be overdone and see about 15% prospective annual returns in the years to come. That should accrue from the company's strong growth outlook, its nearly-4% yield, and about a 5% tailwind from the valuation rising back to fair value.

This No. 2 Top Dividend Pick for 2022 Shows Great 'Utility'

Here's why we see the dividend blue-chip name UGI Corp. as our No. 2 pick for the rest of the year.

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