Updated on October 28th, 2024 by Felix Martinez
Companies that have at least 50 years of dividend growth are considered Dividend Kings.
The majority of the Dividend Kings list consists of large companies like Procter & Gamble (PG), Coca-Cola (KO), and Johnson & Johnson (JNJ).
However, there are also a number of small-cap and mid-cap Dividend Kings. For example, Black Hills Corporation (BKH) is a member of the Dividend Kings list, but its market cap is below $5 billion. This shows that smaller companies can maintain equally impressive streaks of dividend growth.
You can download an Excel spreadsheet with the full list of all 53 Dividend Kings (plus important metrics such as price-to-earnings ratios and dividend yields) by clicking on the link below:
As a well-run utility stock with a recession-resistant business model, investors can expect Black Hills to continue increasing its dividend each year.
This article will discuss Black Hills’ business model, growth prospects, and valuation to determine whether shares are worth purchasing now.
Business Overview
Black Hills Corporation is an electric utility that provides electricity and natural gas to customers in Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. The company was founded in 1941 and is headquartered in Rapid City, South Dakota.
The company has 1.34 million utility customers in eight states. Its natural gas assets include 47,000 miles of natural gas lines. Separately, it has ~9,000 miles of electric lines and 1.4 gigawatts of electric generation capacity.
Source: Investor Presentation
Utility stocks are typically purchased for their stable profits and low volatility. Black Hills is no exception, as over 90% of its assets are regulated. It is also diversified, split between complementary natural gas and electric utility businesses.
Growth Prospects
Black Hills has generated strong growth for a utility. Overall, earnings-per-share grew by 6% annually from 2011-to-2023. Going forward, we expect more modest EPS growth of 4% per year over the next five years, which would be more in line with a typical utility stock.
Black Hills’ growth over the coming years depends on several factors. This includes rate reviews, which drive revenues and profits per kWh.
Another factor is the expansion of the company’s existing assets via new utility infrastructure. Black Hills regularly adds new projects to its growth investment backlog, currently at $4.3 billion from 2024 through 2028.
The company believes its investments will bring future growth.
Source: Investor Presentation
Black Hills’ planned growth investments include new electric transmission lines and new natural gas pipelines to service its customers.
Rate reviews will allow Black Hills to recover investments in its existing systems, thereby almost guaranteeing increasing revenues, which should lead to rising profits down the road.
In 2018, Black Hills exited its oil business, which means that the company is now less impacted by changes in commodity prices. Focusing on its core utility business will likely be a positive for Black Hills going forward. We forecast 4% annual earnings-per-share growth over the next five years.
Competitive Advantages & Recession Performance
To become a Dividend King, a company must inherently possess durable competitive advantages that allow it to outlast competitive threats and continue to perform well during recessions.
This remains true for Black Hills. Demand for electricity and gas is not overly cyclical, although it is somewhat dependent upon weather conditions.
Thus, Black Hills should remain profitable under most circumstances, allowing the company to raise its dividend for decades.
Source: Investor Presentation
The fact that customers tend to stick with their provider means that Black Hills operates a relatively stable business model. The company should also be able to weather future recessions well, which creates appeal for more conservative investors.
Another competitive advantage is the company’s strong balance sheet. Black Hills has a high credit rating of BBB+ from Standard & Poor’s and Fitch, which helps reduce its capital cost.
Black Hills scores highly regarding dividend safety due to its competitive advantages and defensive business model. The company aims to distribute 50% to 60% of its net profits as dividends, which is a healthy payout ratio.
Valuation & Expected Returns
Black Hills stock currently has a price-to-earnings ratio of 15.5, based on expected 2024 earnings per share of $3.90.
Our fair value estimate for Black Hills stock is a P/E ratio of 17, which we believe is a reasonable valuation multiple for a utility company. Therefore, shares appear to be undervalued right now.
If the P/E ratio expands from 15.5 to 17 over the next five years, shareholder returns will be boosted by 3.7% annually. Future earnings-per-share growth and dividends will also boost shareholder returns.
As previously mentioned, we expect a 4% annual EPS growth. The stock also has a 4.3% current dividend yield, leading to total expected returns of 12% per year over the next five years.
Final Thoughts
Black Hills is a relatively small utility company, but it has a compelling dividend growth track record. It has raised its dividend annually for over 54 years, and we believe it is highly likely that the company will continue to grow its earnings and dividends over the coming years.
Utilities such as Black Hills traditionally offer investors high stability and dividend safety.
The stock is currently trading below our fair value estimate. It has an attractive dividend yield and a positive future growth outlook. Due to its nearly 12% expected annual returns, we rate the stock a buy.
The following articles contain stocks with very long dividend or corporate histories, ripe for selection for dividend growth investors:
- The High Yield Dividend Aristocrats List is comprised of the 20 Dividend Aristocrats with the highest current yields.
- The Dividend Achievers List is comprised of ~350 stocks with 10+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.