Published February 26th, 2017 by Bob Ciura
Finding stocks that have paid 100 years of dividends is no easy task. Couple this with a 3%+ starting yield, and the task becomes that much harder.
CenterPoint Energy (CNP) is one of a select few blue chip stocks that offers both. In fact, it goes even further—it has a 4% dividend yield.
It makes the list thanks to its steady business model. CenterPoint is an electric and gas utility, which is one of the most stable business models an investor can find.
CenterPoint recently increased its dividend by 4%, to $1.07 per share annualized. This was its 12th year in a row of consecutive dividend growth.
CenterPoint is a Dividend Achiever, a group of 272 stocks with 10+ years of consecutive dividend increases.
You can see the full Dividend Achievers List here.
This article will discuss why CenterPoint is a relatively unique stock within the utility sector, and how its differentiated business model could produce higher growth in 2017 than its peers.
CenterPoint isn’t a run-of-the-mill utility. Most utility stocks are pure-play electric utilities.
CenterPoint’s business model includes electric transmission and distribution, along with natural gas distribution and energy services.
It operates primarily in the Southern U.S., with more than five million metered customers in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma, and Texas.
Its main businesses are Houston Electric and Texas Natural Gas Distribution.
Source: Wolfe Research Power and Gas Leaders Conference, page 3
The company’s revenue breakdown is as follows:
- Electric Transmission & Distribution (43% of revenue)
- Natural Gas Distribution (31% of revenue)
- Energy Services (26% of revenue)
CenterPoint also owns a 54% interest in Enable Midstream Partners (ENBL), an oil and gas pipeline company.
In the first nine months of 2016, CenterPoint’s operating profit rose 1.3% compared with the same period in 2015.
Operating profit held flat in the core electric transmission business. Fortunately, the natural gas distribution segment posted a 15% increase in operating income, over the first three quarters.
And, performance improved on the electric utility side as 2016 drew to a close. Operating income rose 6.8% in the third quarter.
Source: Q3 Earnings Presentation, page 8
CenterPoint should return to higher growth in 2017, for a number of reasons. The electric utility business is growing again, thanks to favorable rate outcomes and customer additions.
Plus, rising commodity prices should fuel better performance for Enable Midstream, and CenterPoint’s energy services business.
The main strategic initiative for CenterPoint in recent years has been to focus on its midstream and energy services investments.
The company has expanded its energy services business by acquisition, such as the recent purchase of Atmos Energy.
Source: Q3 Earnings Presentation, page 14
CenterPoint expects the deal to close in early 2017, and be accretive to earnings-per-share thanks to growth and synergy opportunities.
In addition, the natural gas distribution business is performing much better lately. Operating profit doubled in the third quarter of 2016.
Source: Q3 Earnings Presentation, page 11
Expectations are for the company to generate earnings-per-share of $1.25-$1.33 in 2017. At the midpoint of guidance, this would represent 7.5%-11% growth from the $1.16-$1.20 of earnings-per-share expected in 2016.
The company’s midstream investments are projected to contribute earnings-per-share of $0.24-$0.28 in 2016.
Source: Wolfe Research Power and Gas Leaders Conference, page 6
Looking forward, CenterPoint forecasts 4%-6% earnings-per-share growth through 2018, with a similar dividend growth rate in that time.
These are very strong growth rates for a utility. Generally, utility stocks generate earnings-per-share growth within a point of GDP growth.
CenterPoint’s main contributors to growth will be improved performance for Enable Midstream, and increased earnings from the energy services business.
Competitive Advantages & Recession Performance
The competitive advantage of being in the utility and midstream energy businesses is a high barrier to entry. Building electricity generation and gas distribution facilities, and pipelines, is very capital-intensive.
Not to mention, the high regulatory barriers of these industries.
This makes it almost impossible for a new competitor to enter the market and take share from existing operators.
That is largely how CenterPoint has maintained more than a decade of annual dividend growth.
The downside of CenterPoint’s diversification strategy is that it makes the company less resistant to recessions.
Many electric utilities barely saw their earnings-per-share decline during the 2008-2009 economic downturn.
However, the Great Recession had a harsher impact on CenterPoint, because gas distribution and energy services are more economically-sensitive businesses.
CenterPoint’s earnings-per-share during the Great Recession are as follows:
- 2007 earnings-per-share of $1.17
- 2008 earnings-per-share of $1.30 (11% increase)
- 2009 earnings-per-share of $1.01 (22% decline)
- 2010 earnings-per-share of $1.07 (5.9% increase)
Earnings-per-share did recover gradually in the aftermath of the recession, but the company did not see a new high until 2012.
Valuation & Expected Total Returns
CenterPoint has not yet released its fourth-quarter results, but the company expects to generate earnings-per-share of $1.18 in 2016, at the midpoint of guidance.
This means the stock trades for a price-to-earnings ratio of 22.8. This is slightly below the S&P 500 Index, which has an average price-to-earnings ratio of 26.
Still, since 2001, CenterPoint stock held an average price-to-earnings ratio of 18.
Since the stock trades well above its historical average, it appears to be slightly overvalued. As a result, investors should not expect continued expansion of the price-to-earnings ratio, given CenterPoint’s mid-single digit earnings growth.
As a result, investor returns moving forward will be comprised of earnings-per-share growth and dividends.
The good news is that the company can still generate satisfactory returns from these two factors:
- 4%-6% earnings-per-share growth
- 4% dividend yield
Using CenterPoint’s earnings growth forecast through 2018 as a baseline, the stock could generate 8%-10% total returns on an annual basis.
CenterPoint’s emphasis on natural gas distribution, energy services, and its investment in a natural gas pipeline company, have diversified it beyond the traditional utility business model.
The investment in Enable Midstream created a bit of uncertainty over the past year. But CenterPoint believes its performance will improve going forward, thanks to rebounding natural gas prices and production growth.
Should the midstream investment and energy services business see accelerating momentum going forward, there is a good chance CenterPoint could generate higher growth than the average in the utility sector.
The company’s mid-single digit earnings growth forecast should provide enough room for continued dividend increases each year.