Black Hills Corporation (BKH +0.35%) is a great starting point for income investors worried about financial downturns. Recessions can be difficult times for companies, but this utility has increased its dividend through at least the last six of these painful economic periods. Here's why this stock might be attractive for conservative investors today.
Black Hills is a boring utility
When you step back and examine what Black Hills does, well, you see it's a fairly boring company. This utility provides natural gas and electricity to roughly 1.3 million customers in Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. Its business is regulated, which means the government has to approve Black Hills' rate increases and capital spending plans. However, it has a modest market cap of $3.3 billion. Some of the biggest companies in the utility sector have markets that are 10 times that, or more. So Black Hills can fly under the radar screen for many investors.
But don't underestimate the little guy here. Black Hills has increased its dividend annually for 53 years. That streak includes a dividend increase through the recession triggered by the coronavirus pandemic, the deep downturn that's now called the Great Recession, and the economic pullback in the early naughts. Those are just the recessions since the turn of the century. The company also managed to increase its dividend during the two recessions in the 1990s and one in the 1980s.
That incredible dividend streak makes Black Hills a Dividend King. To be fair, the dividend growth here isn't particularly exciting. Over the past one-, three-, five-, and 10-year periods, the dividend's annualized growth rate is around 5%. That's faster than the historical growth rate of inflation, which means that, over time, the buying power of the dividend has grown. Income investors focused on dividend growth probably won't find it attractive, but 5% growth is fairly decent for a utility. Conservative investors looking for a reliable income stream that grows modestly over time will probably like the stock.
Black Hills stock has fallen dramatically
That said, Black Hills' stock has declined a painful 26% over the past year. There's a couple of reasons for this, the most notable being the swift rise in interest rates. Utilities like Black Hills are conservative income investments that compete with other income options, like CDs. As interest rates have risen, investors have switched to other income options that don't involve the risk of owning a stock. In fact, the entire utility sector has been trending lower, at least partly thanks to this issue.
More specific to Black Hills is the company's debt levels. While not outlandishly high by any means, the company's debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio is above the levels of the industry's largest players. Management has noted that debt reduction is a key focus in the near term, even pulling back on capital spending to free up more cash for the effort. So higher interest rates are likely to be a bigger drag on Black Hills than on less leveraged utilities. Still, history suggests it can navigate that headwind.
BKH Financial Debt to EBITDA (TTM) data by YCharts
Given the pullback in the stock price, this should probably be seen as an opportunity to buy a Dividend King utility while it is out of favor. The roughly 5% dividend yield is the highest it has been in a decade. That yield is also notably above what you could get from an S&P 500 index fund (around 1.6%) or the average utility, using Vanguard Utilities Index ETF (VPU +0.63%) as a proxy (roughly 3.6%).
Black Hills is a slow and steady tortoise
Black Hills isn't going to be a stock that every investor loves. But those who appreciate collecting a sizable and reliable dividend check each quarter, regardless of the ups and downs of the economy, will probably find it very attractive. And the best part is that it looks like the stock is on sale today. That said, if rates go higher Black Hills stock could languish for a little longer. But if you try to time this purchase too finely you might end up missing the opportunity to buy a great, though perhaps boring, dividend stock.
