Historically, utility stocks have been considered so safe that even widows and orphans could own them. Obviously, that's a blanket statement that shouldn't be applied to every utility, even one like National Fuel Gas (NFG -1.95%), which sits within the rarefied group of companies known as Dividend Kings. But, for conservative investors looking at the energy patch (not utility stocks), this unique utility might make a strong addition. There's a lot to unpack.
A great record
National Fuel Gas has increased its dividend every year for 53 consecutive years. That's an impressive record, making the company a Dividend King, and it speaks to an incredible amount of consistency. Meanwhile, the dividend yield today is a fairly attractive 3.7%. That's comfortably above the average utility, which has a roughly 3.3% yield, using Vanguard Utilities ETF as a proxy.
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Given these facts, a conservative dividend investor might want to do a deep dive into this modestly sized (roughly $4.8 billion market cap) company. The first thing that most will notice is that National Fuel Gas isn't really a utility, or at least it isn't only a utility. In the second quarter, roughly 55% of earnings before interest, taxes, depreciation, and amortization (EBITDA) came from the production of natural gas, 33% was derived from the company's midstream operations, and just 12% was tied to its utility business.
The company has exposure to the natural gas upstream, midstream, and downstream. That's basically the entire value chain for natural gas. Most companies pick one of those areas to focus on, with some operating in two. But very few, often only the largest energy companies, have exposure to all three. And even then, the focus is usually broader, including oil in the mix. In many ways, National Fuel Gas is a unique way to get exposure to natural gas.
The implications of a strange mix
From a big-picture perspective, if you are looking to buy a utility, you should probably pass right by National Fuel Gas. This is because financial results in the production business, which was a major contributor to EBITDA in the second quarter of 2023 at 55% of the total, will rise and fall along with often-volatile energy prices. For example, in the second quarter of 2021, the upstream (production) business was 42% of EBITDA, midstream (pipelines) was 40%, and downstream (utility) was 18%. The difference between the second quarter of 2023 and the second quarter of 2021 wasn't because midstream and utility operations suddenly got more profitable; it was because of commodity price volatility.
Investors looking for a safe and steady utility stock probably won't want that kind of commodity exposure. But conservative investors considering an energy stock might like the consistency provided by the midstream and downstream businesses. The midstream generally acts as a toll taker, getting paid as assets are utilized to move natural gas. Cash flows are fairly consistent over time. Utilities are subject to government regulation and tend to generate reliable cash flows as well.
All in, this looks like a company with commodity exposure to natural gas. But, and this is important, that exposure sits atop a very reliable cash-generating foundation. The proof of that, of course, comes in the form of the steadily growing dividend with which investors have been rewarded. Indeed, you don't increase a dividend for over five decades by accident, so the model here has clearly proven it works. But, a close examination of the chart above will show that you have to be prepared to see the stock rise and fall along with natural gas prices. That's no different than any other driller, but it is notably different from what you might expect from a utility.
What exactly is it?
National Fuel Gas isn't going to be a good fit for everyone. Utility investors should probably avoid it. It likely won't be attractive to investors focused on pure-play drillers or pipeline stocks. But, for a conservative investor considering adding some energy exposure to a diversified portfolio, it could end up being a good mix of risk and reward, given the combination of drilling, midstream, and utility businesses. The attractive yield is an added bonus.
