Tag Archives: dividend-ideas

Piedmont Natural Gas: Steady, Reliable Income

Summary Dividend history is incredibly stable – 3 or 4% annual raises for more than a decade. Market area (Carolinas and Tennessee) is one of the bright spots in the United States. Shares won’t double overnight, but they don’t have to in order to reward shareholders well. Piedmont Natural Gas (NYSE: PNY ) is a large, pure-play natural gas distribution company with a wide berth of operations across the Southeastern United States. The utility has been growing steadily, with earnings and the dividend tracking along at nearly 5%/year for the past twenty years. Consistency has been the name of the game here. This measured growth has been attributable to the favorable rate environment along with population growth strength in the Southeast coupled with the buildout of pipelines surrounding the Marcellus/Utica shale formations in the Northeast. Natural gas development and production in the United States has been and continues to be incredibly strong, yielding abundant supply and relatively stable pricing for gas utilities like Piedmont Natural Gas, especially over the past five years. This strong, consistent operating performance has yielded shares that have been less volatile and consistently outperformed the broader utility index. Will the future be as strong as the past? Operating Results Revenue is down, as has been the case for many natural gas utilities. This is because utilities dealing with lower natural gas prices have to pass the vast majority of the associated cost benefits passed along to consumers in the form of lower utility bills. Excess consumer demand from cheap energy rarely offsets the associated drop in revenue. Further compounding top-ine issues, weather has been at best normal and at worst seasonally warm in the company’s service areas. Decoupling agreements with the utility commission and strong local population growth have done their best in managing to keep growth flat. The company’s small but highly profitable non-regulated businesses have also done well, helping to improve overall operating margins over the 2011-2015 timeframe. (click to enlarge) Piedmont continues to invest significantly in its pipeline infrastructure through capital expenditures. This has continued to result in cash flow deficits, most obviously in 2013/2014. The company notes that it is pushing for new regulatory mechanisms such as IMR tariffs and accelerated rate requests to allow quicker recovery of its cash outlays. The majority of these initiatives went into place in 2013 and the company has made significant strides in getting back to cash flow neutral between its operating and investing activities. Unfortunately the shortfalls in 2013 and 2014 almost doubled long-term debt from $675M in 2012 to nearly $1.4B today. At 3.3x net debt/EBITDA, however, the company is only moderately leveraged and will have no problem covering interest expense on this cheap fixed-rate debt (blended rate is 3.85% fixed rate). While negative consistent overspending in the cash flow statement is generally a sign of mismanagement, in this case it was simply the case of a company investing in its non-utility power generation service delivery projects. Going forward, I expect cash flow shortfalls to be small and investors need not be concerned yet. Conclusion I view Piedmont Energy as an excellent choice in its peer group compared to overvalued alternatives like Atmos Energy (NYSE: ATO ) ( analyzed here ) or lower yielding options like Southwest Gas (NYSE: SWX ) ( analyzed here ). Dividend growth has been incredibly consistent, plugging along at either 3 or 4% increases every year for more than a decade. At a 3.22% yield as of today, the income being thrown off isn’t anything to sneeze at either. Investors might find themselves falling asleep if they hold the stock in their portfolios. For income investors, that is quite often a good thing rather than a bad thing. While I wouldn’t go running to pick up shares at current levels, current shareholders are likely quite happy with the results they’ve been getting and will likely continue to get. I’m not going to disagree with that sentiment. If you’re long, keep on holding and enjoy what is likely to be one of the most stable companies investors have access to in publicly-traded markets. Share this article with a colleague

PNM Resources: Priced Just Right

Summary Management has made significant steps in past five years to improve profitability. Margins are up, energy generation mix is improving. Dividend has followed suit. Heavy interest expenses and overhang of the company’s large ageing coal plant concerns me. PNM Resources (NYSE: PNM ) is a holding company operating two regulated utilities, one in New Mexico and Texas. The company had a rough go of it from 2007-2011; exiting from non-regulated businesses at great cost focus on only serving regulated customers. Management may not have known what they were in for, as the next few years of regulatory environment were tough, with harsh allowed returns and strict oversight. PNM Resources was forced to heavily cut the dividend in between 2007 and 2009 as wholesale electricity prices plunged, chopping it nearly in half from $0.91/share to $0.50/share. The dividend remained stagnant at those depressed levels until a 2012 hike. This marked the start of a company revitalization as PNM Resources has bumped the dividend significantly, averaging 15% per year since then, as operating results recovered. Shares have responded to the flood of good news, rallying off lows near $10/share in 2010 to nearly $30/share today, recovering most of their losses from 2007-2010. Is there more upside for shares? Business Overview The company operates a diversified portfolio of over 2,500MW in generation capacity. Like many utilities, PNM is reducing its reliance on coal, instead shifting to natural gas. However, the largest generation facility for PNM Resources remains its San Juan Generating Station in Waterflow, New Mexico. This plant used to be much larger, but the company was forced to retire 900MW of capacity on regulator and environmentalist pressure – or face heavy capital expenditures related to mandatory upgrade costs. It is likely that this plant will continue to see aggressive treatment by regulators as coal continues its slow-and-steady decline as a source of power in the United States. Investors should expect continued power generation and compliance costs with the overhang of possible additional restrictions on aged coal-fired facilities like this one. PNM Resources expects to keep remaining capacity here online until at least 2022 given the recent contract extension with a local coal supplier for fueling needs. Operating Results (click to enlarge) While 2011 was a much bigger revenue year for 2011, that doesn’t tell the entire story. 2011 was a turning point year where many changes went into place at PNM Resources. The company exited its non-regulated businesses in Texas in 2011 ($329M in proceeds), using the proceeds to pay down debt and repurchase shares. This divesture followed the exiting of New Mexico Gas in 2008 as the company struggled to stay afloat, facing mounting losses in wholesale energy where the company simply couldn’t compete. Tough choices were made and SG&A expenses were cut as well as PNM Resources streamlined its operations. All told after a lot of work, all these changes have resulted in much better operating margins from 2012 forward. (click to enlarge) PNM Resources has run cash deficits as we can see from above, which has been paid for by more than $500M in net long term debt issuance since 2011. Like I feel with most mature utilities, I really want to see these numbers temper. Continued weakness here means no cash flow available for increased dividend payments without increasing leverage through long term debt or dilutive common stock issuance. Interest expense already eats 40% of operating income, well ahead of most other utility businesses I’ve looked at in the past. Conclusion At around 16x 2016 earnings estimates, shares aren’t the most expensive utility shares out there, but they don’t appear to be the cheapest either. The current dividend yield of 2.85% is in-line with historical averages. Management has guided towards 8% dividend growth, which I think is achievable assuming capital expenditures come down and demographic trends continue to be favorable in New Mexico and Texas. The heavy interest expense and lack of operational cash flow concern me. Shares are likely fairly valued at current prices, but investors who are looking to pick up shares of PNM Resources are best served by playing the waiting game and entering around $25.00/share, a spot where shares have tested and experienced solid support over the past year.

TECO Energy: What A Difference A Day Makes

Over the past decade or so TECO Energy has shown stagnant growth and average investment results. Recently the company received a bid to be acquired at a much higher share price. This article shows the difference that just a single day can have on an investment. Over the past decade or so, Tampa, FL-based TECO Energy (NYSE: TE ) has been what I would classify as an “average” investment. You have a slow growing business that just sort of plugs along and pays out a large percent of its earnings in the form of dividends. It’s the classic utility model. I’ll show you what I mean. Here’s a look at the company’s history from the end of 2005 through the end of 2014: TE Revenue Growth -1.8% Start Profit Margin 7.0% End Profit Margin 8.3% Earnings Growth 0.1% Yearly Share Count 1.3% EPS Growth -0.6% Start P/E 17 End P/E 22 Share Price Growth 2.0% % Of Divs Collected 43% Start Payout % 76% End Payout % 93% Dividend Growth 1.6% Total Returns 5.6% TECO began the period with a little over $3 billion in revenue and ended with a bit less than $2.6 billion, or a compound growth rate of -1.8% per annum. Granted certain operations have been sold or discontinued, but it remains that the company as a whole was not growing on the top line. Based on the $3 billion in revenues, TECO earned about $211 million – representing a profit margin of about 7%. By 2014 the margin had expanded to 8.3%, resulting in a net profit of $213 million. In other words, despite the revenue decline, the overall company profitability increased ever so slightly. Yet this slight advantage did not remain for shareholders. At the beginning of the period the company started out with roughly 208 million shares outstanding. By the end of the period this number had grown to 235 million. As such, the earnings-per-share growth also was negative – coming in at -0.6% annually. At the end of 2005 shares of TECO were exchanging hands around $17, resulting in a trailing multiple of about 17. By the end of 2014 the share price had climbed to $20.50, indicating a multiple closer to 22. This is why it’s important to allow for a wide range of possibilities. During this same time frame a company like Union Pacific (NYSE: UNP ) was providing 20% EPS growth, yet it saw P/E compression . On the other hand, TECO was providing negative EPS growth yet saw a higher multiple. When you suggest anything is possible, it’s not just a coverall – strange things happen in the investment world. Due to this multiple expansion, shareholders saw the share price increase by about 2% annually. This is nothing to text home about – especially over a decade period – but still something considering the growth headwind. The real story for TECO has been its dividend. The company, like many utilities, has committed to paying out a large portion of earnings in the form of dividends. Although this payout did not grow much, it did allow for a solid and consistent cash flow. Over the period an investor would have collected about $7.50 per share in dividend payments against capital appreciation of just $3.50. In total this equates to total annual returns of about 5.6% per year. Hence the beginning reference to “average.” Actually it’s slightly impressive given the lack of growth, but basically investors received the dividend payment along the way and not much more. Had you owned a couple thousand shares it could have paid for your electric bill, but there were certainly better wealth providers during this time. Both the business and investment performance of the company wasn’t especially inspiring. Yet this changed a bit due to a recent announcement. On September 4, 2015, TECO announced that Canadian-based Emera Inc. ( OTCPK:EMRAF ) would acquire TECO Energy for $27.55 per share, representing a 48% premium to the July 15th price and roughly 31% higher than the previous close. As a result, shares opened the next trading day over 20% higher, moving to about $26 per share. This is the sort of thing that transforms an investment. During the past decade, shares of TECO Energy have provided about 5.4% annualized returns (quite similar to the exercise above, but moving away from the 2005 and 2014 year-ends.) As a result of the buyout offer, shareholders suddenly have a 7% annualized gain. Over the past five years shares have provided 8.5% annualized returns (incidentally, demonstrating what a move from a low to high earnings multiple can do in the face on a stagnant business.) As a result of the higher price on September 8th, this 8.5% annualized return is suddenly a 12.5% annualized gain. Naturally you can’t predict whether or not a buyout offer will come. Yet the above result is instructive. For one, it shows that business performance and investment performance can vary. The typical investor over the last decade or so actually saw their underlying earnings claim decrease. Had you owned the entire business you would have had a slightly greater claim, but due to share issuance common stockholders were diluted. Still, even though the growth rate was negative, overall returns were still positive. This happened for two reasons. First, investors were willing to pay more for less earnings power. Strange things happen in the investment world, so you can never count out multiple expansion (or contraction). Investor sentiment waxes and wanes as the business results tend to be a bit steadier. Yet even if the multiple had remained steady, thus resulting in negative share price appreciation, your overall returns would not have been negative. Due to a solid and slow growing dividend, you were able to accumulate cash payouts along the way. There’s a lot to be said for collecting dividends while you wait for something good to happen. Of course these payouts can’t always “protect” you, but they can still provide a nice return buffer. You won’t shout in joy over 4% returns, but it’s not an awful consolidation prize. Further, you can reinvest these payments to increase your income. In a more abstract sense, this example demonstrates why it can pay to remain patient. Had you purchased shares a few years ago with an earnings multiple below 15 (or higher), the subsequent decline in earnings and rise in share price resulted in a multiple over 20. You could have then elected to sell, but naturally that would have concluded in missing out in a 20%-plus higher price today. Of course you can’t predict this, but the idea is to be ready for the outcome. If that sort of “missing out” would bother you, then perchance there are worst things in the world than collecting a solid dividend payment while a company regains its footing. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.