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This Reliable Dividend Utility Looks Cheap

By Reuben Gregg Brewer – Oct 2, 2021 at 10:11AM

Key Points

  • This natural gas utility has a solid core business on which it is expanding into new areas.
  • Investors have benefited for decades from annual dividend increases.
  • Right now, its dividend yield and other key valuation metrics are suggesting the stock is relatively cheap.

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The yield on this utility stock has spiked in recent months, and now the stock is starting to look pretty attractive to dividend investors.

Utility stocks aren't the most exciting names around, but for investors that prize consistent dividend payments that's actually a major plus. New Jersey Resources (NJR 0.43%), for example, has a long history of returning cash to shareholders via dividends, and today its yield is at the high end of its historical range. Here's what you need to know to decide if you want to own this boring, but reliable, dividend stock.

1. Core and explore

The foundational business at New Jersey Resources is its regulated natural gas utility operation. As the utility's name suggests, it serves the New Jersey market, providing gas to more than 500,000 customers in Monmouth, Ocean, Morris, Middlesex, and Burlington counties. Although it has to get its rates approved by regulators, this is a very stable, and growing, business.

A hand drawing a price versus value graphic and a bullseye in the low price high value quadrant.

Image source: Getty Images.

On top of that core operation, which makes up around two-thirds of the top line, the company has built a marketing business, a renewable power operation, a midstream division, and a home services business. These are notable in the aggregate, at around one-third of revenue, but individually they aren't the driving force of the company. These operations span from ways to generate more revenue from existing customer relationships (home services) to vertical integration with in the natural gas space (midstream) to areas that have promising long-term growth opportunities (renewable power). However, it is worth noting that the clean energy investments also show that management is aware of, and doing something about, the global push to reduce the use of carbon-based fuels.

2. A consistent and impressive dividend history

New Jersey Resources, while not the biggest utility given its modest $3.3 billion market cap, has a pretty impressive history behind it. The best example of this is the company's 26 years worth of annual dividend increases. That puts it into the Dividend Aristocrat space, which is a rarefied group of companies. Not only that, but the average annualized dividend increase over the past decade was roughly 6.5%. That's about twice the historical level of inflation growth and toward the higher side for a utility. Put simply, the buying power of the dividend has grown over time.

3. A good price, yield wise

That said, today's dividend yield is roughly 4.1%. That's well above the 1.3% investors can get from an S&P 500 Index fund and the 3% investors can get from the average utility, using Vanguard Utilities Index ETF as a proxy. So on a relative basis, New Jersey Resources looks pretty attractive for dividend investors right now. 

NJR Chart

NJR data by YCharts.

But the more interesting point is that the current yield is toward the high end of the company's own historical yield range. That suggests it looks attractive relative to its own history as well. Put the impressive dividend record together with the relatively high yield, and dividend investors will likely want to do a deep dive.

Relative yield isn't the only metric that suggests New Jersey Resources is attractively priced today. The price-to-earnings ratio is around 18.4 times, below its five-year average of 21 times. Price-to-book value is two times compared to the average of roughly 2.5 times. And price to cash flow is roughly nine times versus a five-year average of over 15 times. Price to forward earnings, meanwhile, is 15 times versus a five-year average of 20 times. Those numbers confirm that the historically high dividend yield is, indeed, a sign that the price is relatively cheap today.

A part of the reason for this is likely the recent cancelation of a large midstream pipeline project of which New Jersey Resources was a part. That could hurt near-term performance as it will likely require a one-time charge. It will also make it harder to get natural gas into the region the company serves. It's unlikely to be a major long-term blow to the company's slow and steady growth, though, given the strong demand for natural gas in the North East. 

4. There's a long road ahead for gas

Some investors might be worried about investing in a company essentially tied to natural gas as renewable power's prominence increases. New Jersey Resources has started to address this shift via its own renewable power investments, but it will likely be decades before natural gas sees a material hit from the shift away from carbon-based fuels. In fact, natural gas is often viewed as a cleaner alternative to other, dirtier energy options, like coal and oil. And, as such, it is seen as a key transition fuel.

Even in more aggressive projections, natural gas remains an important part of the energy landscape for the foreseeable future. What's more, an acceleration of the energy transition could be a net benefit. Given that New Jersey Resources' rates are set by regulators, they would likely ensure it gets a decent return on any new spending required to fund a more aggressive clean energy shift. 

A boring, high-yield utility could be great for your portfolio

Although this isn't a "bet the house" type of situation, New Jersey Resources does look like a relative bargain today. For investors looking to add some diversification to their portfolios, it could be a very attractive addition. To be fair, rising interest rates could be a headwind, given the utility sector's heavy use of debt financing (New Jersey Resources' debt-to-equity ratio is 1.4 times, a notable figure that is worth watching). However, that's not likely to derail the company's long-term commitment to shareholders; instead, it appears to be offering up an opportunity to buy for those with longer time horizons.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

New Jersey Resourcess Stock Quote
New Jersey Resourcess
NJR
$48.77 (0.43%) $0.21

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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