Updated on October 30th, 2024 by Felix Martinez
Utility stocks are often associated with long histories of paying dividends to shareholders. Their relatively predictable earnings and recession resistance combine to make increasing dividends somewhat easier over the long term than a highly cyclical business.
However, not all utility stocks are created equal in this sense.
Six utility stocks are on the prestigious list of Dividend Kings, a group of stocks with at least 50 consecutive years of dividend increases. You can see all 53 Dividend Kings here.
You can also download an Excel spreadsheet with the full list of Dividend Kings (plus important metrics such as price-to-earnings ratios and dividend yields) by clicking on the link below:
Northwest Natural Holdings (NWN) is among the six utility stocks on the list of Dividend Kings. It has increased its dividend for 68 consecutive years, giving it one of the longest streaks in the market.
Below, we’ll assess Northwest’s business and growth prospects and decide whether to buy, sell, or hold.
Business Overview
Northwest was founded over 160 years ago as a natural gas utility in Portland, Oregon.
It has grown from a very small, local utility that provided gas service to a handful of customers to a very successful regional utility with interests that now include water and wastewater, which were purchased in recent acquisitions.
The company’s locations served are shown in the image below.
Source: Investor Presentation
Northwest provides gas service to 2.5 million customers in ~140 communities in Oregon and Washington, serving more than 795,000 connections. It also owns and operates ~35 billion cubic feet of underground gas storage capacity.
Finally, its recent move into water has grown to over 33,000 connections, serving over 80,000 people. Once the company’s pending acquisitions close, its water connections will grow to 60,000 connections, ready to serve roughly 145,000 people.
The company reported a net loss of $2.8 million, or $0.07 per share, for the second quarter of 2024, compared to net income of $1.2 million, or $0.03 per share, in the same period of 2023. For the first half of 2024, net income totaled $61.0 million ($1.60 per share), down from $72.9 million ($2.03 per share) the prior year, primarily due to regulatory lag from increased depreciation and pension expenses. Despite these challenges, the company added nearly 16,000 new utility connections, reflecting a 1.8% growth rate. Additionally, NW Natural signed an acquisition agreement with Puttman and Infrastructure Capital Holdings (ICH), which is expected to add around 4,200 water customers and support further expansion opportunities.
In the second quarter, NW Natural’s Natural Gas Distribution segment faced a $2.7 million net income decrease, attributed to regulatory lag from higher depreciation, pension, and tax expenses. Meanwhile, operations and maintenance costs were reduced by $3.5 million, aided by payroll and labor savings. However, the first half of the year also saw adverse impacts from unseasonably warm weather and elevated pension costs, further compounded by lower interest income. The company’s other business activities, such as interstate storage and third-party asset management, experienced a $1.3 million decline in net income due to a previous year’s settlement gain.
NW Natural reaffirmed its 2024 earnings guidance in the range of $2.20 to $2.40 per share, expecting 4%-6% long-term growth through 2027 despite short-term regulatory lag and inflationary pressures. For 2024, the company anticipates a third-quarter loss and a rebound in the fourth quarter. NW Natural’s board also declared a quarterly dividend of $0.4875 per share, aligning with an annual dividend rate of $1.95 per share.
Growth Prospects
Northwest has had difficulty growing earnings-per-share in the past decade, even though the company acquired customers fairly steadily during that time.
The company has struggled with rate cases in some of its localities, although it has recently experienced more success raising prices in Oregon. Since Northwest is a regulated utility, it must ask for pricing increases from local authorities.
Northwest’s customer growth has been quite strong over the past decade. It combines conversions and new construction, both of which have helped move the needle over time by low single digits.
We believe the demographics of Northwest’s served communities support continued customer growth, so this should be a tailwind for revenue and earnings.
Below, Northwest has outlined what it sees as growth targets for the next five years.
Source: Investor Presentation
The company believes it can grow earnings-per-share at 4% to 6% annually while increasing its dividend.
It plans to achieve this by increasing its customer count by at least 1.5% annually, consistent with historical performance, and increasing its rate base by 5% to 7%.
We believe customer growth will be steady, but Northwest’s history on rate cases has us a bit more cautious on rate growth.
Accordingly, we assess Northwest’s long-term growth potential at 6.5% annually in the coming years.
Competitive Advantages & Recession Performance
Northwest’s competitive advantage is similar to that of any other utility; it has a virtual monopoly in its service area. However, the utility business model is vastly different from that of just about any other type of business, as it requires regulatory approval for things like CAPEX and pricing increases.
In return, the company generates a highly predictable and consistent stream of profits from year to year, even during recessions. Approximately 88% of the company’s net income last year was derived from the natural gas utility business.
Additionally, almost two-thirds of Northwest’s customers are residential. We believe Northwest’s fairly heavy concentration on residential customers will continue to serve it well during future recessions.
Below, we have Northwest’s earning-per-share before, during, and after the Great Recession:
- 2007 earnings-per-share: $1.44
- 2008 earnings-per-share: $1.52 (5.6% increase)
- 2009 earnings-per-share: $1.60 (5.3% decrease)
- 2010 earnings-per-share: $1.68 (5.0% increase)
Northwest was able to maintain its earnings during a deep and long recession and produced at least 5% earnings-per-share growth each year before, during, and following the Great Recession.
While utilities can afford to distribute a high level of profits in the form of dividends, given their predictable earnings base, investors should note that increases will likely be small. The most recent increase was just 0.5%, illustrating this point.
We believe the current dividend is safe for the foreseeable future, but we note that dividend growth will likely be difficult to achieve.
Valuation & Expected Returns
Northwest stock has declined significantly from its 52-week high, restoring it to an appealing valuation and dividend yield.
At today’s price, Northwest trades for 17.3 times this year’s earnings, which is higher than our fair value estimate of 15 times earnings. Therefore, we expect a -2.8% annual decrease in total returns from the lowering P/E multiple.
The current dividend yield is 4.9%, which is very high by Northwest’s own historical standards. Combining it with the valuation and expected EPS growth, we forecast total annual returns of 8.6% moving forward.
A mid-to-high single-digit total return potential earns Northwest a hold rating.
Final Thoughts
While Northwest has some challenges to face, we believe its strategic direction of focusing on building out its residential business will lead to positive growth. Steady customer growth is attractive and should help at least buoy earnings at current levels, if not produce a small amount of EPS growth each year.
Northwest’s share price increase in the past year does not improve its value proposition. With total returns projected to roughly 8.6% annually, Northwest can be a fruitful investment for conservative income-oriented investors.
The following articles contain stocks with very long dividend or corporate histories, ripe for selection for dividend growth investors:
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.