In 2023, the utilities sector faced significant turbulence, driven by the upsurge in interest rates. But we believe ONE Gas (OGS), a utility stock that we have held in high regard, is poised to outperform in 2024, says Nikolaos Sismanis, analyst at The Sure Passive Income Newsletter.

This is due to the company featuring one of the most predictable earnings and dividend growth outlooks we have encountered in our research universe. To understand why ONE Gas can predict its earnings and dividends for multiple years, let’s look at what makes its business so predictable.

Firstly, ONE Gas has a strong position in the market. It has an extensive network that delivers natural gas to about 2.3 million customers through 65,000 miles of pipelines. This makes it the largest natural gas distributor in Kansas and Oklahoma and the third-largest in Texas. It has a big market share of 72%, 88%, and 13% in these states, giving it a strong advantage.

In addition to its market dominance, ONE Gas operates within a regulatory framework where state authorities determine distribution rates. These regulatory bodies play a crucial role in ensuring that utility companies such as ONE Gas can make a reasonable profit on their capital investments.

This predictable rate-setting process has, in turn, empowered ONE Gas’s management to share very precise forecasts for its medium-term net income and dividend growth. Accordingly, management expects base rate increases to be between 7% and 9% through 2027.

Alongside an expanding customer base, stable natural gas consumption trends, fixed CAPEX needs, and strategic share capital dilution, management expects earnings per share to grow between 4% and 6% per annum over the same period.

The ability to forecast such a specific earnings-per-share growth trajectory provides management with the confidence to present an equally attractive dividend growth outlook. As a result, they anticipate dividend hikes to range from 4% to 6%, in line with their earnings per share outlook.

With the reliable foresight offered by ONE Gas’ forecasts and shares recently offering a respectable dividend yield of 4.6% -- an all-time high level – we anticipate a significant surge in investor interest in the stock in 2024, particularly as interest rates are expected to ease.

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