With a modest $5 billion or so market cap, Black Hills Corporation (NYSE:BKH) is definitely not one of the largest utilities in the United States. However, it does offer investors one of the longest records of annual dividend increases among its peers, having reached an incredible 49 consecutive years -- which pits it against some of the most iconic names on the Dividend Aristocrat list. It has no intention of letting that streak die. Here's what Black Hills has planned to keep its business, and dividend, growing. 

Spreading its bets

Black Hills operates regulated electric utilities, regulated natural gas utilities, and unregulated electric assets that sell power to others under long-term contracts. Its regulated rate base is spread roughly equally between electric and natural gas customers, with operations across seven states. That's a notable amount of diversification for such a small utility. 

A man working atop an electric pole

Image source: Getty Images.

The biggest knock against Black Hills is likely to be its exposure to coal. It owns a number of coal mines, and that fuel source makes up around a third of its power capacity, down from around two-thirds a decade ago. The interesting thing here is that Black Hills' power production from coal has fallen only a little bit on an absolute basis. The big change has been growth in natural gas-fired plants and increasing exposure to renewable power assets. This wasn't so much a wholesale change as a slow and steady shift driven by the purchase and sale of assets. 

All in all, Black Hills is clearly looking to change with the times. But it is doing so in a slow and steady fashion. That may not be a happy medium for environmentalists, but it is a very appropriate approach from a business perspective for a conservatively run utility. That's doubly true when a company is looking to protect a nearly 50-year record of annual dividend increases. 

Where to from here

Which leads to a look at the future. Black Hills' payout ratio is projected to be a reasonable 58% in 2019. Although up from around 50% in 2015, it's still well below the average for some of the largest names in the industry, which is closer to 70%. In fact a few of the industry giants, notably including Duke, Dominion, and Southern, are well above that average. In the end, Black Hills may be small, but its dividend appears to be well covered and there's little reason to expect that to change. (Which is one key reason why it has historically had a lower yield than these industry giants.) 

BKH Dividend Yield (TTM) Chart

BKH Dividend Yield (TTM) data by YCharts

Helping backstop the dividend's safety is the company's investment grade balance sheet. Digging into that a little bit, the company estimates that its net debt to capitalization was around 58% at the end of the first quarter, down from 64% a year ago. Meanwhile, it has used less than a third of its $750 million bank credit line -- which can be expanded up to $1 billion if needed. All in all, there's no particular reason to be concerned about Black Hills' financial condition.   

Which is good news, because the company has plans to spend $2.8 billion between 2019 and 2025 on capital growth projects. Around 90% of that spending is going toward regulated utilities, where the investment will help Black Hills get customer rate increases approved by the government. And the $2.8 billion currently in the plan could rise over time, as the company expects to find additional opportunities for spending between 2020 and 2025. All of that spending will, in the end, help to keep the dividend heading higher. 

BKH Chart

BKH data by YCharts

Keep an eye on this small fry

Black Hills may not be a giant utility, but it appears to have what it takes to keep rewarding investors with dividend hikes -- just as it has for nearly five decades. A strong balance sheet, a reasonable payout ratio, and $2.8 billion in capital spending plans should allow it to keep hiking its dividend in the mid-single digit range, just as it has been doing for the past few years.   

The problem with buying the utility today is that it appears to be a little pricey, with a big stock advance since early 2018 driving the yield down from 3.6% to around 2.6%. But the entire utility sector has seen a notable rally, so this isn't exactly unique to Black Hills. Investors who bought the company for its dividend and dividend growth prospects should likely stick around. Those interested in a new position, meanwhile, would be better off keeping it on their watch list for now. Investor sentiment will eventually turn and make Black Hills a dividend growth bargain again. And it looks like this utility small fry is worth the wait.