NW Natural: 61 Years of Dividend Growth

When you think about it, Dividend Kings are boring stocks. Boring in the sense that they chug along steadily, offering practically no surprises. On the other hand, they make great additions to diversified income portfolios. After all, 50 or more years of dividend growth is a big deal. This shows stability and commitment to shareholder returns. In this respect, NW Natural (NYSE: NWN) is almost unrivaled.

This Pacific Northwest gas utility is a true champion with regard to dividend payments. There are only six US companies that have increased their annual distribution for 60 or more years. NW Natural ties for the second place with Dover Corp (NYSE: DOV). Both of them have rewarded their shareholders with growing dividends for 61 years. Only one company has done better: American States Water Co (NYSE: AWR) boasts 62 years of dividend growth.

It’s hardly surprising that utilities feature heavily on the Dividend Kings list. They enjoy robust and steady cash flows. In addition, their regulated operations make these cash flows predictable. On the flipside, this is a sector vulnerable to interest rate increases. It goes beyond the effect on borrowing costs. Utilities became highly sought-after in the years of record-low interest rates as an alternative to bonds. But with rates slowing going up again, investors may find utility stocks less attractive and seek income elsewhere.

Meet NW Natural

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It began all the way back in 1859 as the Portland Gas Light Co. It was the first gas company in the Pacific Northwest, created through a perpetual charter by the territorial government.

In 1958, it adopted the name Northwest Natural Gas Co, changing it yet again to NW Natural in 1997.

Based in Portland, Oregon, NW Natural serves more than 725,000 residential, commercial, and industrial natural gas customers in Oregon and Washington. In addition to gas distribution, the company also does gas storage. Some of its storage facilities are in California.

By its own estimate, NW Natural is the biggest independent natural gas utility in the Pacific Northwest. It had total assets of about $3.1 billion as of end-2016. Its market cap at present stands at around $1.8 billion.

Latest financials

Early in May, NW Natural released its results for the first quarter of 2017. The company performed in line with analyst expectations, growing its net income to $40.3 million from $36.6 million in the same quarter of 2016. Earnings per share went up to $1.40 from $1.33. The number a year earlier reflected the impact of a non-cash disallowance linked to environmental actions. The new set of figures benefited from colder weather and customer growth, the latter boosting income at the utility segment.

NW Natural stuck with its full-year guidance for earnings of $2.05 to $2.25 per share. The company noted that its estimate assumed “customer growth from our utility segment, average weather conditions, slow recovery of the gas storage market, and no significant changes in prevailing regulatory policies, mechanisms, or outcomes, or significant laws or regulations.”

Dividends

Investors in NW Natural are currently collecting a quarterly dividend of $0.47 per share, up from $0.4675 last year. The yield is 3.1%.

For all its impressive dividend track record, NW Natural is not a company that will please stockholders with serious distribution growth. Over the past decade, the annual dividend has grown at a compound annual rate of just 3%. It’s something investors need to be ready to accept if they buy into a mature business, especially a utility company. Steady cash flows and predictable income make the dividends safe. However, revenues and earnings typically grow at modest rates. Thus, big dividend hikes are not the norm in the utility sector.

Valuation

NW Natural would be a solid pick for investors with low tolerance for risk. It should also work well in a diversified income portfolio where higher-growth but riskier stocks would pick up the slack from slow but safe holdings.

That said, NW Natural is far from attractive right now in terms of valuation. At the time of writing, its shares are trading at $61.75. This compares to a 52-week high of $66.17 and a respective low of $53.50.

Moreover, the P/E ratio is 28.1, while the industry median is 17.5, according to GuruFocus. The forward multiple is also off-putting: 28.7 for NW Natural against an industry median of 18.9.

On top of that, the company’s current yield is below its median for the past ten years. It also trails the industry median. Coupled with the other valuation metrics, there’s little to recommend NW Natural at this point.

Disclosure:

I do not have a financial interest in any of the companies featured in this article, nor do I plan on having one within the next three days.

This article reflects my opinions. The company is not paying me to write it and I do not have any business relationship with any companies mentioned in it.

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