This reliable dividend utility looks cheap
UTility stocks aren’t the most exciting names out there, but for investors who appreciate consistent dividend payouts, this is actually a major plus. New Jersey Resources (NYSE: NJR), for example, has a long history of returning cash to shareholders through dividends, and today its return is at the high end of its historical range. Here’s what you need to know to decide if you want to own this boring, but reliable dividend stock.
1. Core and explore
New Jersey Resources’ core business is its regulated natural gas utility operation. As the name suggests, the utility serves the New Jersey market, supplying gas to more than 500,000 customers in Monmouth, Ocean, Morris, Middlesex and Burlington counties. Although it needs to get its tariffs approved by regulators, it is a very stable and growing company.
Image source: Getty Images.
In addition to this core operation, which accounts for roughly two-thirds of revenue, the company has built a marketing business, renewable energy operation, midstream division, and home service business. These are notable overall, at around a third of revenue, but individually they are not the driving force behind the business. These operations range from ways of generating more revenue from existing customer relationships (home services) to vertical integration in the natural gas space (midstream) to areas that have promising long-term growth opportunities (energy renewable). However, it should be noted that investments in clean energy also show that management is aware of the global push to reduce the use of carbon-based fuels and is doing something about it.
2. A consistent and impressive dividend history
New Jersey Resources, while not the largest utility given its modest market cap of $ 3.3 billion, has a pretty impressive story behind it. The best example of this is the company’s 26 years of annual dividend increases. This places him in the Dividend Aristocrat space, which is a rarefied corporate group. Not only that, but the annualized average increase in dividends over the past decade was around 6.5%. This is about double the historical level of inflation growth and towards the higher side for a public service. Simply put, the purchasing power of the dividend has increased over time.
3. A good price, in terms of yield
That said, today’s dividend yield is around 4.1%. That’s well above the 1.3% that investors can get from an S&P 500 Index fund and the 3% that investors can get from the average utility, using Vanguard Utilities Index ETF as an agent. So on a relative basis, New Jersey Resources looks pretty attractive to dividend investors right now.
NJR data by YCharts.
But the most interesting point is that the current performance is at the high end of the historical performance range of the company. This suggests that he also looks attractive in relation to his own story. Set the impressive dividend record with the relatively high yield, and dividend investors will likely want to take a deep dive.
Relative performance isn’t the only metric that suggests New Jersey Resources is attractively priced today. The price-to-earnings ratio is about 18.4 times, lower than its five-year average of 21 times. The book value is twice the average of about 2.5 times. And the price / cash flow ratio is about nine times versus a five-year average of over 15 times. The price of futures earnings, meanwhile, is 15 times versus a five-year average of 20 times. These numbers confirm that the historically high dividend yield is indeed a sign that the price is relatively cheap today.
Part of the reason is likely the recent cancellation of a large intermediate pipeline project of which New Jersey Resources was a part. This could adversely affect performance in the short term, as it will likely require a one-time charge. It will also make it more difficult to get natural gas to the region served by the company. This is unlikely to be a long-term blow to the company’s slow and steady growth, given the high demand for natural gas in the Northeast.
4. The road is long for gasoline
Some investors might be worried about investing in a business primarily related to natural gas as the importance of renewable energy increases. New Jersey Resources has started coping with this shift through its own investments in renewable energy, but it will likely be decades before natural gas is significantly affected by the shift away from carbon-based fuels. In fact, natural gas is often viewed as a cleaner alternative to other, more polluting energy options, such as coal and petroleum. And, as such, it is considered a key transition fuel.
Even in more aggressive projections, natural gas remains an important part of the energy landscape for the foreseeable future. In addition, an acceleration of the energy transition could be a net benefit. Since New Jersey Resources’ tariffs are set by regulators, they would likely guarantee a decent return on any new spending needed to fund a more aggressive shift to clean energy.
Boring, high-yield utility might be ideal for your wallet
While this is not a âbet the houseâ type of situation, New Jersey Resources looks like a bargain today. For investors looking to diversify their portfolio, this could be a very interesting addition. To be fair, rising interest rates could be a hindrance, given the massive use of debt financing by the utility industry (New Jersey Resources’ debt-to-equity ratio is 1.4 times, a notable figure that deserves to be watched). However, this does not risk derailing the company’s long-term commitment to shareholders; instead, it appears to offer a buying opportunity for those with longer time horizons.
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Reuben Gregg Brewer has no position in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.