Look to New Jersey for a Quality Utility

05/15/2020 5:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

Utilities have held up relatively well in the first four months of a tumultuous 2020. But there’s some risk that their bulky dividends could be thrown overboard to steady the ship in choppy waters, notes Richard Moroney, growth and income expert and editor of Dow Theory Forecasts.

S&P 1500 Index utilities average a negative total return of 15% this year, versus an average negative return of 25% for all stocks in the index.

Of course, the big appeal for utility stocks tends to be their outsized dividends. Unfortunately, 2020 promises to be a painful year for income investors.

Payout ratio is a key gauge for measuring a dividend’s sustainability. The metric calculates how much of a company’s profits cash distributions consume.

Most stocks sport payout ratios below 50% — dividend-paying stocks in the S&P 1500 average payout ratios of 45%. Payout ratios tend to be far higher for utilities, which often have steady enough operations and cash flows to keep servicing their dividends during downturns.

In our Top 15 Utilities model portfolio, we’re adding New Jersey Resources (NJR). The utility has delivered steady profit growth over the last year and grown operating cash flow in each of the last two quarters.

Aggressive capital spending in recent years is paying off in the form of solid operating growth, which New Jersey Resources augments with a small but consistent stream of conversions from electricity or propane to natural-gas heating (annual gains of 1% to 1.5% in the customer base).

The company provides natural gas to 548,000 customers in New Jersey but generates two-thirds of its revenue from gas storage and pipeline operations that stretch from New England to the Gulf Coast.

The stock trades at 16 times projected 2020 earnings, a 15% discount to its industry median. March-quarter results were slated for release May 8.

Analysts target 2% sales growth and a 12% rise in per-share profits en route to growth of 7% in both sales and earnings for the year ending September. New Jersey Resources yields 3.8%.

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