Updated May 13, 2021 by Bob Ciura
The Dividend Aristocrats are a group of stocks in the S&P 500 Index with more than 25 years of consecutive dividend increases. These companies have high quality business models that are proven and have a remarkable ability to grow dividends every year regardless of the economy.
We have compiled a list of all 65 Dividend Aristocrats along with relevant financial metrics such as dividend yield and P / E ratio. You can download the full list of Dividend Aristocrats by clicking the link below:
The list of Dividend Aristocrats is spread across multiple sectors including consumer staples, finance, industrials, and healthcare. One group that is surprisingly underrepresented is the utilities sector. The list of Dividend Aristocrats includes only three utility stocks: Consolidated Edison (ED), NextEra Energy (NEE), and Atmos Energy (ATO).
The fact that only two utilities are on the list may come as a surprise, especially since utilities are widely viewed as stable dividend stocks. This article discusses Atmos Energy’s path to becoming a Dividend Aristocrat.
Atmos Energy can trace its origins back to 1906 when it was founded in Texas. Since that time it has grown both organically and through mergers. Today Atmos Energy ddistributed and stores Natural gas in eight countries, portion over 3 Millions of customers and should to generate over $ 3.4th Billion in sales this year.
Atmos Energy is a large-cap stock with a market capitalization of over $ 13 billion.
The company serves over 3 million natural gas customers in eight different states.
Source: Investor Presentation
On February 2, the company released financial results for the first quarter of fiscal 2021. Revenue increased 4.4% year over year to $ 915 million. Sales operating income increased $ 29 million to $ 210 million for the quarter, driven by a $ 37 million increase in rates and customer growth.
Pipelines and storage operating income increased $ 17 million to $ 89 million, aided by rate increases and a decrease in O&M costs.
Operating cash flow was $ 157 million, a decrease of $ 15 million from the previous year. The decrease in cash flow was due to the increase in the price of natural gas, the timing of the customer pick-up and the timing of the recovery of gas costs.
Earnings per share were $ 1.71 for the first quarter, up 16% from $ 1.47 for the same period last year. Given the jump in earnings in the first quarter, we’ve raised our earnings per share estimate for this year by one nickel to $ 5.05.
Profit growth in the utilities industry tends to mimic GDP growth. However, we anticipate Atmos Energy will continue to outperform this trend as low gas prices will allow the company to further accelerate its capital investments with limited regulatory intervention.
As a result, the company should benefit from strong growth in the interest base, which in turn generates 6% to 8% annual earnings per share growth, according to management forecasts.
The growth drivers for Atmos Energy are new customers, rate increases and aggressive growth investments. One benefit of operating in a regulated industry is that utilities can periodically increase rates, which in effect ensures steady growth.
Source: Investor Presentation
The company’s main risk is its ability to obtain timely and positive adjustments to regulatory interest rates. If the company generates lower than expected allowable returns, it can have a significant impact on profits.
However, we believe that Atmos can achieve EPS growth of at least 6% annuallyby continuing to improve gross margin, lowering operating costs as a percentage of sales and Sales growth through acquisitions and organic customer growth.
The Company continues to submit favorable tariff cases with its various locations This also leads to slight increases in sales over time, as we saw in again 2020 full– –year Resultsand again about the first half of 2021. The core sales business was running very good in the first quarter, which we consider a positive indicator for the result in 2021ts.
Competitive advantage and recession performance
Atmos Energy’s main competitive advantage is the high regulatory hurdles the utility industry faces. Gas supply is necessary and vital to society. As a result, the industry is heavily regulated so that a new competitor can practically no longer enter the market. This gives Atmos Energy and its annual results a high level of security.
Another competitive advantage is the company’s stable business model and solid balance sheet, which gives it an attractive cost of capital. This allows him to fund acquisitions and growth investments, resulting in oversized earnings per share growth.
In addition, the utility business model is very recession-resistant. While many companies posted sharp earnings declines in 2008 and 2009, Atmos Energy’s earnings per share continued to rise. Earnings per share during the Great Recession are shown below:
- 2007 earnings per share of $ 1.91
- 2008 earnings per share of $ 1.99 (4% growth)
- 2009 earnings per share of $ 2.07, up 4%
- 2010 earnings per share of $ 2.20, up 6%
The company grew healthy even in the worst of the economic downturn. That resilience allowed Atmos Energy to keep increasing its dividend every year.
Valuation and expected return
Atmos Energy is expected to make $ 5.05 this year. Based on this, the stock is trading at a price-earnings-ratio of 19.9. This is slightly above our fair value estimate of 19, which is close to the stock’s average 10-year price-to-earnings ratio.
As a result, Atmos Energy stocks appear to be slightly overvalued. If the stock valuation were to go back to fair value estimates over the next five years, the corresponding multiple contraction would reduce the annual return by 0.9%. This could be a bit of a headwind for future returns.
Fortunately, the stock could continue to generate positive returns for shareholders through earnings growth and dividends. We expect the company to grow earnings 6% per year over the next five years.
In addition, the share has a current dividend yield of 2.5%. Atmos Energy last increased its dividend by 8.7% in November 2020. This was the 37th year of dividend growth for Atmos Energy.
Source: Investor Presentation
All in all, the total expected return from Atmos Energy could look like this:
- 6% profit growth
- -0.9% multiple reversals
- 2.5% dividend yield
Overall, Atmos Energy is expected to deliver an annualized total return of 7.6% over the next five years, making the stock attractive to investors interested in dividend growth and total returns.
Income investors will also find the yield attractive and the dividend is secure. The company has forecast a payout ratio of ~ 50% in 2021, indicating a sustainable dividend. This is why we consider Atmos Energy a blue chip stock.
The Atmos Energy share is attractive to investors looking for above-average returns and regular dividend growth. Because of this, Atmos Energy can serve a valuable purpose in the portfolio of a high income investor as the stock offers a very safe and growing dividend income stream and its dividend yield well above the average dividend yield of the S&P 500 index.
Atmos Energy is also a dividend aristocrat and should increase its dividend every year. Therefore, risk averse investors who are currently primarily looking for income, such as B. Retirees, see higher value when buying utility stocks like Atmos Energy.
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