Sempra: A Pandemic Proof Utility

09/18/2020 5:00 am EST


Ben Reynolds

CEO, Sure Dividend

Sempra Energy (SE) serves one of the largest utility customer bases in the U.S. by distributing natural gas and electricity in Southern California to over 20 million customers, notes growth and income expert Ben Reynolds, editor of Sure Dividend.

The company also owns a majority stake in Texas-based Oncor which itself has over 10 million customers.  Sempra additionally owns and operates other utilities and merchant renewable energy projects, liquefied natural gas facilities, and gas pipes and storage in the U.S. and Latin America.

It currently trades at a market cap of $36 billion. Sempra Energy reported its second-quarter earnings results on August 5th. Adjusted earnings-per-share jumped from $1.10 to $1.65 year-over-year thanks to favorable conditions across the business.

Furthermore, Sempra’s pandemic and recession-proof business model enabled management to actually raise the midpoint of its guidance from $7.10 to $7.50.

The company completed the sale of its South American businesses in June, further concentrating the business on its core transmission and distribution energy infrastructure in North America’s most attractive markets.

Sempra’s biggest advantages are its economies of scale and its regulated monopoly. The company also benefits from two key trends: the transition towards cleaner energy and the U.S. ascendancy as a global energy leader.

The company also strengthened its position a few years ago when it sold off most of its non-core assets in order to deleverage the balance sheet and further amplify its competitively advantaged regulated utility businesses.

As a regulated utility with dominant, mission-critical assets, Sempra Energy is quite immune to recessions. This bore out in the 2008-2009 recession where its earnings-per-share actually increased as well as this past quarter where it actually raised annual guidance while many other businesses faced a significant contraction and reduced or suspended annual guidance.

We expect Sempra Energy to grow earnings-per-share at a rate of 6% per year through 2025 as continued capital investments in its 5-year $11.9 billion capital plan will combine with gradual rate increases to drive mid-single-digit long-term growth.

Sempra Energy stock trades for a price-to-earnings ratio of 16.2, based on expected earnings-per-share of $7.60 for this year.  Our fair value estimate for the stock is a price-to-earnings ratio of 19, so the stock is significantly undervalued after a recent decline. Multiple expansion could add approximately 3.2% to shareholder returns per year over the next five years.

Combining this tailwind with earnings per share growth (6%) and the current dividend yield (3.4%), gives us expected annualized total returns of 12.6% per year over the next five years.

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