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Nathan Parsh
Nathan Parsh
Articles (77) 

2 Utility Companies That Recently Raised Dividends

Utility companies are hotbeds of dividend income. Companies in this sector often provide appealing yields

May 18, 2020 | About:

Utility companies are often owned by investors for their dividend income. These so-called “widows and orphan” stocks usually provide market-beating yields, a very attractive feature in a stock for a dividend growth investor. I’ve covered a number of them in my time here at GuruFocus, but two companies have recently rewarded shareholders with a dividend increase. 

Southern

Southern Co. (NYSE:SO) provides electricity and natural gas services to 8 million customers, primarily in the southern United States. The company should generate nearly $22 billion in revenue this year. The stock trades with a market capitalization of $57.4 billion.

Shareholders will receive a 3.2% dividend increase for the June 8 payment, giving Southern 20 years of dividend growth in a row. The recent raise is also in line with the five-year average increase of 3.4%. In fact, this is in line with the company’s one, three and 10-year average increases as well. Southern is a solid example of a “slow and steady” dividend grower.

Based off of this increase, the annualized dividend is now $2.56. Analysts expect the company to earn $3.12 this year, which gives a payout ratio of 82%. Utility companies often have high payout ratios and Southern is no exception. The company’s 10-year average increase is 75%, so the expected ratio for this year is only slightly above this level. I am not yet concerned with the payout ratio, but earnings growth will likely have to pick up for increases to remain at the same level. The current yield is 4.7%, a generous yield that is just above the 10-year average yield of 4.6%. For comparison purposes, the average yield of the S&P 500 is 2.1%.

The company is trading around $54 at the time of writing. Using the expected earnings per share for the year, the stock has a price-earnings ratio of 17.3. This compares to the average price-earnings ratio of 16.2 that the stock has traded with since 2010.

Southern has been fairly consistent with its dividend increases over various lengths of time. While the payout ratio is on the high side, even for a utility, the dividend yield is attractive and shares are only mildly overvalued relative to the historical average. I have position in the company and may add to it over the next few weeks. If I didn’t own a utility, I would strongly consider buying shares of Southern.

UGI

UGI Corp. (NYSE:UGI) provides gas and electric utility service to customers in Pennsylvania. The company has been in existence since the early 1880s and has paid an uninterrupted dividend since 1885. UGI is expected to produce $7.2 billion in revenue in 2020 and trades with a market capitalization of $6.5 billion.

The company increased its dividend by 1.5% for the upcoming July 1 payment, marking 33 consecutive years of dividend growth. The most recent raise stands in contrast to the five-year average increase of 7.3%. While low growth is preferred to no growth or a cut, this is something investors should monitor. A drastic decline in dividend growth can be a one-time issue or a sign that the company’s business is in trouble. Given the company’s history of dividend growth, I am not terribly worried about future raises.

The new annualized dividend is $1.32. The analyst community expects that UGI will earn $2.45 in 2020, giving the stock a payout ratio of 54%. This is quite low for a company in the utility sector. UGI has historically conservatively managed its dividend, as evidenced by its 10-year average payout ratio of 43%. Both the expected and historical payout ratios are very healthy. The stock offers a yield of 4.3% today, which compares very favorably to the 10-year average yield of 2.8%. The current yield is also more than double the average yield of the S&P 500.

Using the current price of $31 and earnings per share estimates, UGI has a forward price-earnings ratio of 12.7. This is a discount to the average multiple of 16.2 times earnings that the stock has traded at for the last decade.

Aside from the low dividend increase, there is a lot to like about UGI. The company has paid a dividend since the mid-1880s. The current yield and valuation appear attractive relative to the historical averages. Investors looking for exposure to the utility sector should include UGI in their research.

Final thoughts

Utility stocks remain a great place for investors to pick up dividend yield. Though Southern and UGI don’t have exactly high growth, they make up for this with a yield in the mid-4% range. Southern's valuation is slightly ahead of its long-term average, while UGI trades at a solid discount to its own average. I believe UGI can be bought today, while some may wish to wait for a pullback for Southern. Personally, I don’t mind paying up for a company with a long history of dividend growth and a attractive yield.

Which utility company would you buy? Feel free to leave a comment below.

Author disclosure: The author is long Southern Co.

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About the author:

Nathan Parsh
I was originally born in Detroit, Michigan, before moving to Maryland to begin a career as an educator. This is my 14th year teaching. My wife and I have two young children who keep us on our toes.

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