In the U.S. equity markets, there are roughly 15,000 publicly traded companies, so it’s understandable if some of these fall through the cracks. There are so many ways to parse down this universe, and in particular, we’re thinking of one strategy that has beaten the market in the past. For dividend-seekers, though, one of the best ways to find investments ideas is to look at dividend growth streaks, and sometimes, unheralded industries often provide the best opportunities to find gems.
Take the gas utility industry, for example. There are a handful of companies operating in this space, but just two have increased their dividend payments for 40 or more consecutive years.
If that’s not elite, we don’t know what is.
While we don’t recommend jumping into both names on blind historical faith alone, it’s worth exploring each of them a bit to determine if dividends are sustainable, and if they’d make a good addition to your equity portfolio.
Northwest Natural Gas
We’ll start with the best first. Northwest Natural Gas Co (NYSE:NWN) has grown its dividends in 57 straight years, which is the longest such streak in the gas utility industry. As its name suggests, Northwest Natural Gas is a natural gas distributor and storage provider that operates in the Pacific Northwest. According to the Motley Fool, the company has been J.D. Power’s top-ranked Western U.S. utility provider in three of the past six years.
Northwest currently pays a dividend yield of 4.2% at a payout ratio of 85%, which is above the gas utility industry’s ‘sweet spot’ of 70%. Generally speaking, it’s widely understood that companies in this space prefer to keep at least 30% of their earnings available for non-regulated businesses, but positive earnings and free cash flow trends indicate there are no real read flags here.
Value investors like Ken Fisher and David Shaw are invested in Northwest, and shares aren’t overly expensive at 18 times forward earnings. While there may be more attractive natural gas stocks from a valuation and growth standpoint, the income is nearly unmatched, especially in terms of the streak. An unusually cold January is expected in the Pacific Northwest next year, so we’ll be watching if this affects the sentiment surrounding the company over the next few months.
Longer-term investors shouldn’t worry about weather forecasts, though, just monitor that payout ratio. If it rises another ten percentage points or so, there may be reason to panic, but for now, the dividend growth streak should continue.
National Fuel Gas
National Fuel Gas Co. (NYSE:NFG), meanwhile, is the only other gas utility company that has grown dividends for 40 or more consecutive years; it’s 43 to be exact. Unlike Northwest Natural Gas, National Fuel’s market is in western New York and northwestern Pennsylvania, and it serves about 732,000 customers to Northwest’s 700,000. The company pays a smaller dividend yield of 2.1% albeit at a more reasonable payout ratio between 40% and 50% of earnings.
As the lower payout ratio indicates, National Fuel has a greater portion of its earnings to dedicate to its unregulated businesses, which most analysts expect to register 15% to 20% revenue growth next year. Late last month, the company said that it expects oil and natural gas production during its 2014 fiscal year to increase between 20% and 37%, which on average, is 11 percentage points higher than its forecast just one quarter earlier. Much of this optimism is a result of increased drilling at National Fuel’s Marcellus properties.
As is the case in the Pacific Northwest, most meteorologists expect a slightly worse winter to hit New York and Pennsylvania in comparison with long-term averages, particularly with regard to snowfall. We know that the supply side has been booming at National Fuel, but don’t discount the possibility of above-average demand for its natural gas in the coming months. Fair valuations across the board are nice, and the dividend streak shouldn’t end any time soon, especially with the company’s low payout ratio.
In terms of income consistency, we’d consider both names, but if pressed to choose one, we’d pick National Fuel Gas because it pays a lower percentage of its earnings out as dividends in comparison to Northwest Natural Gas.