Updated on May 13th, 2021 by Bob Ciura
The Dividend Aristocrats are a group of stocks in the S&P 500 Index, with 25+ years of consecutive dividend increases. These companies have high-quality business models that have stood the test of time, and showed a remarkable ability to raise dividends every year regardless of the economy.
We have compiled a list of all 65 Dividend Aristocrats, along with relevant financial metrics like dividend yield and P/E ratios. You can download the full Dividend Aristocrats list by clicking on the link below:
The list of Dividend Aristocrats is diversified across multiple sectors, including consumer goods, financials, industrials, and healthcare. One group that is surprisingly under-represented, is the utility sector. There are only three utility stocks on the list of Dividend Aristocrats: Consolidated Edison (ED), NextEra Energy (NEE), and Atmos Energy (ATO).
The fact that there are only three utilities on the list may come as a surprise, especially since utilities are widely regarded as being steady dividend stocks. This article will discuss Atmos Energy’s path to becoming a Dividend Aristocrat.
Atmos Energy can trace its beginnings all the way back to 1906 when it was formed in Texas. Since that time, it has grown both organically and through mergers. Today, Atmos Energy distributes and stores natural gas in eight states, serving over 3 million customers, and should generate about $3.4 billion in revenue this year.
Atmos Energy is a large-cap stock with a market capitalization above $13 billion.
The company serves over 3 million natural gas customers spread across eight different states.
Source: Investor Presentation
On February 2nd, the company released financial results for the fiscal 2021 first quarter. Revenue was up 4.4% year-over-year to $915 million. Distribution operating income was up $29 million to $210 million for the quarter, which was attributable to a $37 million increase in rates and customer growth.
Pipeline and storage operating income was up $17 million to $89 million, bolstered by rate increases and a decline in operating and maintenance expenses.
Operating cash flow was $157 million, a $15 million decrease year-over-year. The decline in cash flow was from the increase in the price of natural gas, the timing of customer collections, and the timing of gas cost recoveries.
Earnings-per-share came to $1.71 in Q1, up 16% from $1.47 in the year-ago period. Given the earnings beat in Q1, we’ve boosted our earnings-per-share estimate for this year by a nickel to $5.05.
Earnings growth across the utility industry typically mimics GDP growth. However, we expect Atmos Energy to continue outperforming this trend as low gas prices will allow the company to continue accelerating its capital investments with limited interference from regulators.
As a result, the company should benefit from strong rate base growth which in turn will generate annual earnings per share growth in accordance with management’s 6%-8% guidance.
The growth drivers for Atmos Energy are new customers, rate increases, and aggressive growth capital expenditures. One benefit of operating in a regulated industry is that utilities are permitted to raise rates on a regular basis, which virtually assures a steady level of growth.
Source: Investor Presentation
The primary risk facing the company is its ability to achieve timely and positive regulatory rate adjustments. If the company achieved lower than expected allowed returns, it could cause significant harm to profits.
However, we believe Atmos can achieve at least 6% annual EPS growth through continued improvements in gross margin, reductions in operating costs as a percentage of revenue, and top line growth via acquisitions as well as organic customer growth.
The company continues to file favorable rate cases with its various localities that provide for small revenue increases over time as well, as we saw again in 2020 full–year results, and again over the first half of 2021. The core distribution business performed very well in the first quarter, which we think is a positive indicator for 2021 results.
Competitive Advantages & Recession Performance
Atmos Energy’s main competitive advantage is the high regulatory hurdles of the utility industry. Gas service is necessary and vital to society. As a result, the industry is highly regulated, making it virtually impossible for a new competitor to enter the market. This provides a great deal of certainty to Atmos Energy and its annual earnings.
Another competitive advantage is the company’s stable business model and sound balance sheet, giving it an attractive cost of capital. This enables it to fund accretive acquisitions and growth capital expenditures, driving outsized earnings per share growth.
In addition, the utility business model is highly recession-resistant. While many companies experienced large earnings declines in 2008 and 2009, Atmos Energy’s earnings per share kept growing. 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 (4% growth)
- 2010 earnings-per-share of $2.20 (6% growth)
The company still generated healthy growth even during the worst of the economic downturn. This resilience allowed Atmos Energy to continue increasing its dividend each year.
Valuation & Expected Returns
Atmos Energy is expected to earn $5.05 this year. Based on this, the stock trades with a price-to-earnings ratio of 19.9. This is slightly above our fair value estimate of 19, which is near the 10-year average price-to-earnings ratio for the stock.
As a result, Atmos Energy shares appear to be slightly overvalued. If the stock valuation retraces to the fair value estimate over the next five years, the corresponding multiple contraction would reduce annual returns by 0.9%. This could be a small headwind for future returns.
Fortunately, the stock could still provide positive returns to shareholders, through earnings growth and dividends. We expect the company to grow earnings by 6% per year over the next five years.
In addition, the stock has a current dividend yield of 2.5%. Atmos Energy last raised its dividend by 8.7% in November 2020. This marked the 37th year of dividend growth for Atmos Energy.
Source: Investor Presentation
Putting it all together, Atmos Energy’s total expected returns could look like the following:
- 6% earnings growth
- -0.9% multiple reversion
- 2.5% dividend yield
Added up, Atmos Energy is expected to generate 7.6% annualized total returns over the next five years, making the stock attractive for investors interested in dividend growth and total returns.
Income investors will also find the yield attractive, and the dividend is secure. The company has a projected 2021 payout ratio of ~50%, which indicates a sustainable dividend. As a result, we view Atmos Energy as a blue chip stock.
Atmos Energy stock is attractive for investors looking for an above-average yield and regular dividend growth. Because of this, Atmos Energy can serve a valuable purpose in an income investor’s portfolio as the stock offers a very secure and growing dividend income stream, and its dividend yield is well above the average dividend yield of the S&P 500 Index.
Atmos Energy is also a Dividend Aristocrat, and should raise its dividend each year. Therefore, risk-averse investors looking primarily for income right now–such as retirees–could see greater value in buying utility stocks like Atmos Energy.