When it comes to utilities, investors may know U.S. giants like NextEra, Duke, American Electric Power, and Southern. You may not have heard of Black Hills (BKH -0.63%), which is just a fraction of the size of these giants. Don't let that stop you from buying the stock, which is trading with a yield of 4.1%, near a 10-year high. Here are some near-term and long-term reasons to like this income investment.
Why now?
Black Hills is out of favor at the moment, partly because it is pulling back on capital spending this year so it can focus on debt reduction. That's a prudent management decision that will likely result in higher spending next year before capital investing goes back to a more normal run rate. In other words, this is likely a bump in the road and not a long-term shift in the company's future prospects.
Image source: Getty Images.
Investor concerns, however, have led to a stock pullback. And, as noted, the price declines have pushed the dividend yield up toward 10-year highs, at around 4.1%. It looks like Black Hills is being put on the sale rack. Given the company's incredible dividend history, a historically high yield should be very attractive to investors looking to create a reliable income stream.
To put some numbers on that, this utility is a Dividend King. That means it has increased its dividend for more than 50 consecutive years. You don't achieve that kind of record without working through some rough patches along the way.
The most recent increase, meanwhile, was in the fourth quarter of 2022. So investors should be on the lookout for another hike as 2023 comes to a close. But even if that doesn't happen (debt reduction might take precedence), the timing of the last increase guarantees that 2023's dividend will be higher than 2022's, adding another year to the dividend streak. As long as the company hikes it again sometime in 2024, the streak will remain unbroken.
Picking up a Dividend King with a historically high yield even though the business continues to perform reasonably well is an opportunity that shouldn't be ignored.
The long term
That said, the real attraction here is the company's success over time. That's largely been driven by Black Hills operating in exceptionally strong markets. For example, Colorado has been one of the utility's best markets, with customer growth of 11.1% over the past five years. That's well more than twice the 4% population growth in the state.
Arkansas saw the second-highest customer growth over the past five years at 8.2%. That compares to population growth in the state of just 2%, meaning that the markets Black Hills serves in that state grew more than four times as fast as the state overall.
Even the company's worst-performing market was still pretty good. In South Dakota, Black Hills' customer count grew 4.1% while the state's population expanded by 5%. The reason that's still a net positive is that 4.1% is more than twice the national average population growth of 2%.
This brings the story to the utility's overall customer growth over the past five years, which stands at 5.8%. That's about twice as good as the average population growth for the states it serves of 2.3%. And nearly three times better than the 2% average population growth for the U.S. The company summed it up quite nicely, stating in a recent presentation that it was benefiting from "ongoing population migration into our states." Adding customers is the preferred growth path because more customers means higher capital spending to meet demand, which also means regulators will likely approve higher rates to cover spending. It's a virtuous cycle.
Slow and boring
Black Hills isn't an exciting stock and likely never will be. However, it can provide a nice cornerstone investment to a broadly diversified income portfolio. There are other utilities out there that are better known. There are utilities with higher yields. But the mix of yield and business opportunity here is pretty attractive right now. It will be well worth your effort to get to know Black Hills right now.
