A Model of Self-Reliance

04/21/2011 11:39 am EST


Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

The utility that lit up legendary Deadwood, South Dakota mines some of the fuel it burns in its power plants and pays a very civilized dividend, writes Ian Wyatt of Small Cap Investor PRO .

Most publicly traded utilities have the distinct advantage of paying investors a dividend. This dividend significantly enhances the equities' total return over time.

Every portfolio should include dividend-paying stocks as part of a diversification strategy. So when I came across a diversified energy company that was paying a 4.5% yield to investors, I had to write about it.

This regulated power business is an oil and gas producer, but it also dabbles in coal and some energy marketing too.

The company is Black Hills Corp. (BKH) and it just finished the first quarter with a comfortable 13% increase in share price, as you can see in this chart.

Click to Enlarge

Black Hills, which now has a market cap of $1.3 billion, grew out of the partnership that first brought electric lights to the legendary gold rush town of Deadwood, South Dakota in 1879. The company began selling its services in the 1880s and shares have been traded on the New York Stock Exchange for more than 30 years.

The South Dakota company has more than 750,000 gas and electricity customers in seven Western states. It also operates a coal mine near Gillette, Wyoming, sells its excess electric capacity, produces crude oil and natural gas, and markets power-related products and services throughout North America.

And of course, it pays that $1.46-per-share annual dividend that I mentioned.

Black Hills just brought a new coal-fired generating plant online in Wyoming that burns the coal that the company mines. The project came in ahead of schedule and under budget.

Its mine serves the needs of its Black Hills Power and Cheyenne Light businesses, while the Colorado Electric subsidiary is adding a gas-fired plant that is to begin operating later this year.

Last Year’s Troubles Are Over
Black Hills reported a mixed bag at the end of 2010, with decreases in some performance metrics in its non-regulated energy business during the fourth quarter, but decent results for the full year.

The performance driver for Black Hills was its regulated business, which posted a 31% gain from continuing utility operations. In fact, its portfolio has been undergoing a transformation since 2007, shifting the emphasis to the regulated operations and away from unregulated businesses.

Overall, net income in 2010 was $68.7 million, or $1.76 per share, down from $81.6 million ($2.04 a share) in 2009. Most of the decreases were due to charges related to long-term debt restructuring to improve the health of its balance sheet, as well as lower oil and natural gas prices.

Weather also plays a role in utility performance, of course—and early 2010 was unusually warm, which reduced the need for power to heat homes and businesses.

The picture will likely change this year, with crude oil on the New York Mercantile Exchange finishing March at levels previously seen only in the summer of 2008—so that part of Black Hills' business could contribute additional revenue.

Also, coal mined in the Powder River Basin saw the per-ton price more than double during 2010, and it could continue to rise.

Black Hills expects improved cash flow in 2011, and has stuck with earnings guidance calling for full-year EPS of $1.90 to $2.15 per share. The Thomson Reuters consensus earnings estimate is $2.01 per share.

The company also is looking to put some wind in its sails with half-ownership in a 29-megawatt wind project. The project will help it meet Colorado requirements that it generate 30% of its electricity using renewable resources by 2020.

Black Hills is no newcomer to rewarding investors with dividends. The company has a consistent 41-year track record of raising payments.

The stock should be on the list of any small-cap investor looking for a solid dividend play, especially with the rapidly rising prices of oil and coal.

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