Two Natural Gas Dividend Plays

12/10/2008 12:23 pm EST


Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Ian Wyatt, editor of Growth Report, likes stable dividend payers to help wait out the bear market, and he names two favorites.

There’s no reason to simply wait for the bear market to end. And now is not the time to go after risky growth stocks or beaten-down value stocks, especially not if you’re retired or approaching retirement. Why not seek a little protection and profits while the stock market works through its problems?

I’m going after the middle ground—a place you can safely park your money and collect some dividends and even capital gains while the stock mark is uncertain.

These [natural gas-related] stocks all pay at least as much as T-bills. And there’s upside due to three critical factors:

Demand. All new homes in the US use natural gas for heating and cooling. Natural gas is cheaper than electricity and more environmentally friendly.

Supply. The US has massive natural gas reserves, [which makes it] an attractive alternative to foreign oil.

Pricing power. Natural gas utilities and pipeline companies have pricing power, [and] price hikes go right to the bottom line.

Laclede Group (NYSE: LG), a utility holding company, engages in the retail distribution and sale of natural gas in eastern Missouri.

As of September 30th, it served approximately 630,000 residential, commercial, and industrial customers in St. Louis and parts of ten other counties. Bolstered by the sale of a subsidiary, LG’s diluted earnings per share for fiscal 2008 (ending in September) rose to $3.58 from $2.31 for fiscal 2007. The strong earnings performance was led by Laclede’s core subsidiary, Laclede Gas, Missouri's largest natural gas distribution utility. It earned $39.2 million, an increase of 20.6% over fiscal 2007.

After fiscal 2008 results were announced, Laclede raised its dividend starting in January to $1.54 on an annualized basis, up 2.7% from $1.50 in 2007. This is the 62nd consecutive year that Laclede has paid a dividend. At a recent price of $47, the P/E is 13x based on earnings for the past 12 months. The dividend yield is 3.1%.

El Paso Pipeline Partners (NYSE: EPB) is a limited partnership formed by El Paso (NYSE: EP) to own and run natural gas transportation pipelines and storage assets. El Paso Pipeline increased earnings 20% for the third quarter ended in September, and earnings before interest and taxes (EBIT) rose 27%.

In September, El Paso Corp. sold the partnership interests in two gas companies, signaling [its] commitment to both natural gas as an energy source and to the structure of the partnership. The acquisition is expected to stabilize and add to cash flow: El Paso Pipeline management expects to provide 8% to 10% average annual growth in distributable cash flow through 2012.

The third-quarter cash distribution was 30 cents per subordinate unit, and this will rise to 32 cents in the first quarter of 2009. At a recent price of $15, the yield was 8%. El Paso Pipeline does not expect to tap capital markets until after 2009.

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