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Dividend King In Focus: Northwest Natural Gas


Published September 12th, 2016 by Ben Reynolds

Northwest Natural Gas (NWN) is a conservatively managed natural gas utility with operations in Oregon and Washington State.  The company’s biggest markets are:

In total, Northwest Natural Gas serves over 700,000 customers.  The company was founded in 1859 and currently has a market cap of $1.7 billion.

The image below shows the company’s locations and service territory area.

nwn-service-area

Source:  Northwest Natural Gas August 2016 Investor Presentation, slide 5

Northwest Natural Gas offers investors dividends and safety.  The company has one of the longest streaks of consecutive dividend increases of any business…

Northwest Natural Gas has paid increasing dividends for 60 consecutive years.  The company’s long dividend history makes it one of just 18 Dividend Kings; dividend stocks with 50+ years of consecutive dividend increases.  You can see all 18 Dividend Kings here.

The company offers an above average yield of 3.2% to go along with its long history of rising dividends.

Northwest Natural Gas operates in 2 segments:

The utility segment has generated 94% of the company’s income through the first 6 months of fiscal 2016.  The segment is by far the company’s largest.

Keep reading this article to learn more about Northwest Natural Gas’s investment prospects.

Current Events

Northwest Natural Gas 2nd quarter results showed earnings-per-share decline from to $0.07 per share from $0.08 per share in the same quarter a year ago.

Most businesses can’t ‘blame it on the weather’.  Northwest Natural Gas actually can.  Oregon has experienced an unusually warm year.  According to Northwest Natural Gas’s press release, temperate were ‘42% warmer than average’.

Despite warmer weather in its most recent quarter, Northwest Natural Gas has delivered adjusted earnings-per-share growth of 1.4% through the first 6 months of fiscal 2016.

The company’s adjusted earnings-per-share guidance for fiscal 2016 is $2.05 to $2.20 per share.  This implies growth of 4.6% to 12.2% in fiscal 2016 for Northwest Natural Gas.  The company will have to have strong quarters in the back half of the year to hit its guidance.

Competitive Advantage & Recession Performance

Northwest Natural Gas’s competitive advantage comes from its status as the dominant natural gas utility provider in the region it serves.

Natural gas utilities create natural local monopolies.  There is little incentive for new entrants into the market.

Customers need natural gas regardless of the overall economy.  As a result, Northwest Natural Gas tends to perform well during recessions.

The company’s earnings-per-share through the great recession of 2007 to 2009 are shown below to illustrate this point:

Northwest Natural Gas actually hit its all-time earnings-per-share high in 2009 – during the worst of the Great Recession.  The increase was because of gas cost savings and a regulatory adjustment for income taxes paid.  Gas volume supplied actually declined 10% in 2009 when the company hit its all-time earnings-per-share high.

Northwest Natural Gas’s results are not closely tied to the overall economy.

But careful readers will note a disturbing prospect; earnings-per-share are significantly lower now than they were in 2009.

Growth Prospects & Total Return

Make no mistake – Northwest Natural Gas is not a fast growing stock.

Earnings-per-share were $2.35 in 2006.  They are projected to be $2.20 (at the high end of management’s estimates) in 2016.

Northwest Natural Gas investors have not seen any per share growth over the last decade.

Northwest Natural Gas actually realized solid earnings-per-share growth (for a utility) from 2000 through 2009 of 4.7% a year.  In 2009, the company switched CEOs.

Under CEO Gregg Kantor, Northwest Natural Gas has seen earnings-per-share decline from $2.83 in 2009 (the year he took over) to $1.96 in fiscal 2015.

The company is performing better in 2016 than in recent years, but growth will likely continue to be sluggish.

An optimistic earnings-per-share growth rate for the next few years is around 4.5% a year.  This factors in population growth in the region and inflation.

Adding in the company’s ~3% dividend yield gives investors an expected growth rate of around 7.5% a year over the next few years for Northwest Natural Gas.

The company’s poor track record under CEO Kantor shows that growth could well be much slower than population growth, regulation, and inflation would otherwise allow for.

Valuation & 8 Rules Rank

A company with mediocre total return expectations (if things go right) should trade at a lower than average price-to-earnings ratio.

Unfortunately, Northwest Natural Gas does not trade for a low price-to-earnings ratio. The company is currently trading for a forward price-to-earnings ratio of 25.3.  This is near 10 year highs.

Utilities are valued more like bonds than stocks due to their safety and slow growth.  Low interest rates have caused Northwest Natural Gas’s share price to increase around 70% since the beginning of 2010 – while earnings-per-share have declined significantly.

To make matters worse, the Federal Reserve is slowly increasing rates.  Utilities will likely underperform in an era of rising interest rates as the value of no growth and low growth assets falls when interest rates rise.

Northwest Natural Gas is ranked using The 8 Rules of Dividend Investing below.  The company is compared to 185 other businesses (186 total including Northwest Natural Gas) with 25+ years of steady or rising dividends.

Consecutive Years of Dividend Increases:  Northwest Natural Gas has paid increasing dividends for 60 consecutive years.  The company easily qualifies for the Sure Dividend database (stocks require 25+ years of steady or rising dividends to be in the database).

Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 3.2 percentage points per year.
Source: S&P Factsheet

Dividend Yield:  Northwest Natural Gas’s dividend yield of 3.2% ranks is the 56th highest in the Sure Dividend database.

Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 2.2 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns

Payout Ratio:  Northwest Natural Gas has a payout ratio of 81% using adjusted earnings.  The company’s fairly high payout ratio leaves little room for dividend growth in excess of earnings-per-share growth going forward.  Northwest Natural Gas ranks 165 out of 186 on this metric.

Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Long-Term Growth Rate:  Using a fairly aggressive expected growth rate of 4.3% a year over the next several years ranks Northwest Natural Gas at 142 out of 186 on the growth metric.  Even with optimistic expectations, the company does not offer particularly attractive growth prospects.

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends from 1972 through 2015.
Source: An Economic Perspective on Dividends

Long-Term Volatility:  Northwest Natural Gas’s operations are stable.  As a result, the company has a low annualized 10 year stock price standard deviation of just 22.6%.  The company’s low deviation ranks it at 38 out of 186 on this metric.

Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race

Final Thoughts

Northwest Natural Gas offers a reasonably high dividend yield with low volatility.  The company’s weak growth prospects, high valuation, and high payout ratio give it a poor rank using The 8 Rules of Dividend Investing.

Northwest Natural gas may be a ‘safe’ investment as far as receiving steady income goes, but it is not an attractive investment for investors looking for total returns.

The company has a negative catalyst; rising interest rates could reduce the company’s valuation multiple and result in significant share price declines.  The company’s low growth means that earnings-per-share will have to grow for years to make up for potential valuation multiple declines.


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