Dividend Aristocrats In Focus: Atmos Energy

Up to date on Might thirteenth, 2021 by Bob Ciura

The Dividend Aristocrats are a bunch of shares within the S&P 500 Index, with 25+ years of consecutive dividend will increase. These firms have high-quality enterprise fashions which have stood the take a look at of time, and confirmed a outstanding capability to lift dividends yearly whatever the financial system.

We’ve compiled a listing of all 65 Dividend Aristocrats, together with related monetary metrics like dividend yield and P/E ratios. You’ll be able to obtain the complete Dividend Aristocrats listing by clicking on the hyperlink beneath:

The listing of Dividend Aristocrats is diversified throughout a number of sectors, together with shopper items, financials, industrials, and healthcare. One group that’s surprisingly under-represented, is the utility sector. There are solely three utility shares on the listing of Dividend Aristocrats: Consolidated Edison (ED), NextEra Vitality (NEE), and Atmos Vitality (ATO).

The truth that there are solely two utilities on the listing might come as a shock, particularly since utilities are broadly thought to be being regular dividend shares. This text will talk about Atmos Vitality’s path to changing into a Dividend Aristocrat.

Enterprise Overview

Atmos Vitality can hint its beginnings all the best way again to 1906 when it was fashioned in Texas. Since that point, it has grown each organically and thru mergers. Right now, Atmos Vitality distributes and shops pure fuel in eight states, serving over 3 million clients, and may generate about $3.4 billion in income this yr.

Atmos Vitality is a large-cap inventory with a market capitalization above $13 billion.

The corporate serves over 3 million pure fuel clients unfold throughout eight totally different states.

Supply: Investor Presentation

On February 2nd, the corporate launched monetary outcomes for the fiscal 2021 first quarter. Income was up 4.4% year-over-year to $915 million. Distribution working earnings was up $29 million to $210 million for the quarter, which was attributable to a $37 million improve in charges and buyer development.

Pipeline and storage working earnings was up $17 million to $89 million, bolstered by fee will increase and a decline in working and upkeep bills.

Working money movement was $157 million, a $15 million lower year-over-year. The decline in money movement was from the rise within the value of pure fuel, the timing of buyer collections, and the timing of fuel value recoveries.

Earnings-per-share got here to $1.71 in Q1, up 16% from $1.47 within the year-ago interval. Given the earnings beat in Q1, we’ve boosted our earnings-per-share estimate for this yr by a nickel to $5.05.

Progress Prospects

Earnings development throughout the utility business usually mimics GDP development. Nonetheless, we count on Atmos Vitality to proceed outperforming this development as low fuel costs will permit the corporate to proceed accelerating its capital investments with restricted interference from regulators.

Consequently, the corporate ought to profit from sturdy fee base development which in flip will generate annual earnings per share development in accordance with administration’s 6%-8% steerage.

The expansion drivers for Atmos Vitality are new clients, fee will increase, and aggressive development capital expenditures. One good thing about working in a regulated business is that utilities are permitted to lift charges frequently, which just about assures a gradual stage of development.

Supply: Investor Presentation

The first danger going through the corporate is its capability to realize well timed and optimistic regulatory fee changes. If the corporate achieved decrease than anticipated allowed returns, it may trigger important hurt to income.

Nonetheless, we imagine Atmos can obtain at the least 6% annual EPS development through continued enhancements in gross margin, reductions in working prices as a proportion of income, and prime line development by way of acquisitions in addition to natural buyer development.

The corporate continues to file favorable fee circumstances with its varied localities that present for small income will increase over time as properly, as we noticed once more in 2020 full–yr outcomes, and once more over the first half of 2021. The core distribution enterprise carried out very properly within the first quarter, which we expect is a optimistic indicator for 2021 results.

Aggressive Benefits & Recession Efficiency

Atmos Vitality’s essential aggressive benefit is the excessive regulatory hurdles of the utility business. Fuel service is important and important to society. Consequently, the business is very regulated, making it just about unattainable for a brand new competitor to enter the market. This offers an excessive amount of certainty to Atmos Vitality and its annual earnings.

One other aggressive benefit is the corporate’s steady enterprise mannequin and sound stability sheet, giving it a gorgeous value of capital. This permits it to fund accretive acquisitions and development capital expenditures, driving outsized earnings per share development.

As well as, the utility enterprise mannequin is very recession-resistant. Whereas many firms skilled massive earnings declines in 2008 and 2009, Atmos Vitality’s earnings per share saved rising. Earnings-per-share throughout the Nice Recession are proven beneath:

• 2007 earnings-per-share of $1.91
• 2008 earnings-per-share of $1.99 (4% development)
• 2009 earnings-per-share of $2.07 (4% development)
• 2010 earnings-per-share of $2.20 (6% development)

The corporate nonetheless generated wholesome development even throughout the worst of the financial downturn. This resilience allowed Atmos Vitality to proceed growing its dividend every year.

Valuation & Anticipated Returns

Atmos Vitality is predicted to earn $5.05 this yr. Based mostly on this, the inventory trades with a price-to-earnings ratio of 19.9. That is barely above our honest worth estimate of 19, which is close to the 10-year common price-to-earnings ratio for the inventory.

Consequently, Atmos Vitality shares look like barely overvalued. If the inventory valuation retraces to the honest worth estimate over the subsequent 5 years, the corresponding a number of contraction would cut back annual returns by 0.9%. This could possibly be a small headwind for future returns.

Luckily, the inventory may nonetheless present optimistic returns to shareholders, via earnings development and dividends. We count on the corporate to develop earnings by 6% per yr over the subsequent 5 years.

As well as, the inventory has a present dividend yield of two.5%. Atmos Vitality final raised its dividend by 8.7% in November 2020. This marked the thirty seventh yr of dividend development for Atmos Vitality.

Supply: Investor Presentation

Placing all of it collectively, Atmos Vitality’s whole anticipated returns may appear like the next:

• 6% earnings development
• -0.9% a number of reversion
• 2.5% dividend yield

Added up, Atmos Vitality is predicted to generate 7.6% annualized whole returns over the subsequent 5 years, making the inventory engaging for buyers excited about dividend development and whole returns.

Earnings buyers may also discover the yield engaging, and the dividend is safe. The corporate has a projected 2021 payout ratio of ~50%, which signifies a sustainable dividend. Consequently, we view Atmos Vitality as a blue chip inventory.

Ultimate Ideas

Atmos Vitality inventory is engaging for buyers searching for an above-average yield and common dividend development. Due to this, Atmos Vitality can serve a useful goal in an earnings investor’s portfolio because the inventory provides a really safe and rising dividend earnings stream, and its dividend yield is properly above the typical dividend yield of the S&P 500 Index.

Atmos Vitality can also be a Dividend Aristocrat, and may increase its dividend every year. Subsequently, risk-averse buyers trying primarily for earnings proper now–comparable to retirees–may see larger worth in shopping for utility shares like Atmos Vitality.