The utility sector remains a good place to find stocks trading with a reasonable valuation and offering a market-beating yield.
One name that I've come to like from afar is Sempra Energy (SRE, Financial) as the stock is trading below its historical valuation and yielding more than twice that of the average yield of the S&P 500. The company also has several projects coming online and in the works that should lead to growth in the coming years.
Sempra last reported earnings results on Feb. 25. Revenue grew 7.8% in the fourth quarter to $3.2 billion, but was $352 million below what Wall Street analysts had expected. Adjusted earnings of $553 million, or $1.90 per share, compared favorably to earnings of $447 million, or $1.55 per share, in the previous year. Adjusted earnings per share were 33 cents ahead of estimates.
For 2020, revenue increased 5% to $11.4 billion. Adjusted earnings of $2.35 billion, or $8.03 per share, was an improvement from adjusted earnings of $1.91 billion, or $6.78 per share, in 2019. Earnings per share grew 18.4% year over year.
In addition to strong results for the quarter and full year, Sempra has several catalysts for growth.
First, the ability to raise rates goes a long way in utility companies' ability to grow. Sempra has received approval to grow its base rate for its San Diego Gas & Electric Company by 9% and its San Diego County & Southern California Gas Company by 12% over the next five years.
The company's Oncor business, which was purchased in 2018 and is the largest energy provider in Texas with 10 million customers, added 77,000 connections last year. The additions represented a 20% improvement from 2019 and is the highest growth rate the business has ever had. Oncor also had a record number of interconnection requests for its transmission business, evidence that the company's focus on renewable and battery storage is paying off. To this end, Oncor completed 260 miles of transmission projects in West Texas. The business has a presence in one of the fastest-growing markets in the U.S. in the Dallas-Fort Worth area, which should only add to its customer base.
Sempra is also investing heavily to grow its business. The company spent nearly $11 billion over the last two years improving its North American operations and has an ambitious plan of investing $32 billion from 2021 through 2025. This company record capital plan will be primarily focused on investment in Sempra's U.S. utility business, with $29 billion set aside for projects.
The Cameron LNG facility is now in operation and is expected to contribute $400 million to $450 million of earnings in the first 12 months of operation. The high end of this range would have represented more than 19% of 2020 earnings, showing just how valuable Cameron is likely to be for the company.
The company has several projects coming online that should help cement it as a leader in its business. Chief among them is the recently commissioned Veracruz marine terminal, which will provide capacity to store more than 2 million barrels of refined oil. When completed, Veracruz will be one of the largest fuel terminals in Mexico.
In addition, Sempra will issue stock to purchase the 30% of IEnova, an energy infrastructure company in Mexico, that it doesn't already own. This asset will then be combined with Sempra's existing infrastructure operations. The company announced recently that it would sell a 20% minority stake to KKR & Co. Inc. (KKR, Financial) for nearly $3.4 billion.
Sempra ended the year with total assets of $66.6 billion, current assets of $4.5 billion and cash and equivalents of $960 million. Total liabilities were $41.7 billion and current liabilities of $6.9 billion. Total debt was $24.2 billion, with $2.4 billion due within the next year.
Analysts surveyed by Yahoo Finance expect Sempra to earn $8.06 per share in 2021. Using Monday's closing price of $133.84, shares have a forward price-earnings ratio of 16.6. For context, Sempra has an average price-earnings ratio of 22 and 19.9 over the last five and 10-year periods of time. To put how low of a valuation this is historically, this would be Sempra's lowest average price-earnings ratio since 2012 if the company were to average this figure for an entire year.
Shareholders received a 5.3% increase for the upcoming April 15 dividend payment. This gives the company 11 consecutive years of dividend growth. The dividend has compounded at a rate of more than 8% since 2011. Shares yield 3.3%, which is 20 basis points higher than Sempra's 10-year average yield of 3.1%. The current yield is also more than double the average yield of the S&P 500 index.
The company should distribute $4.40 of dividends per share in 2021, which results in an expected payout ratio of 55% using analysts' estimates for the year. This is in line with Sempra's average payout ratio of 56% since 2011. Leadership has stated a payout ratio target of 50% to 60% of earnings per share, implying that dividend growth will probably mirror bottom-line growth.
In the midst of the Covid-19 pandemic, Sempra managed to grow its full-year revenue by a mid-single-digit rate while increasing its earnings per share at a high double-digit clip.
Utility companies are often owned for their ability to withstand difficult times and produce income. Sempra has demonstrated both the ability to thrive in a difficult environment and also offers a much higher yield than the S&P 500. The company also has several tailwinds that will only add to the business.
Best of all, Sempra is trading with a valuation that is below both its medium- and long-term average. Applying expected earnings per share for 2021 to the 10-year average price-earnings ratio results in a price target of approximately $160, which would be a 19.5% return from the most recent closing price. Adding in the stock's yield would push total returns into the low 20% range.
Given the company's recent results, catalysts for growth, yield, valuation and possible returns, Sempra Energy isn't just a boring utility company, but an investment option that could be very rewarding for shareholders.
Disclosure: The author has no positions in any stocks mentioned in this article.
Read more here:
- Undervalued Unilever Presents a Good Entry Point
- Eaton: Improving Business Does Not Justify the Valuation
- Emerson: Should You Buy This Dividend King?
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.