Up to date on October fifth, 2021 by Bob Ciura
In 2021, Nationwide Gasoline Fuel (NFG) raised its dividend for the 51st consecutive yr. That places the corporate among the many elite Dividend Kings, a small group of shares which have elevated their payouts for a minimum of 50 consecutive years. You may see the total listing of all 32 Dividend Kings right here.
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Nationwide Gasoline Fuel has remained a comparatively small firm, buying and selling at a market capitalization of $5 billion. Nonetheless, a small market cap is just not a detrimental characteristic when investing; fairly the opposite.
Regardless of its small measurement, Nationwide Gasoline Fuel has promising long-term development prospects and a sexy valuation. As well as, its 3.3% dividend yield is way greater than the broader market yield of 1.4%, and there may be room for extra dividend raises down the highway.
Nationwide Gasoline Fuel is a diversified and vertically built-in firm that operates in 4 segments: Exploration & Manufacturing, Pipeline & Storage, Gathering and Utility. The upstream section (exploration & manufacturing) is by far an important one, because it generates 44% of the EBITDA of the corporate.
The midstream division (pipeline & storage and gathering) generates 39% of EBITDA whereas the downstream section (utility) generates the remaining 17% of EBITDA.
Whereas Nationwide Gasoline Fuel appears to be a pure commodity inventory on the floor, with all of the disadvantages associated to the boom-and-bust cycles of commodity producers, the corporate has a superior enterprise mannequin when in comparison with commodity producers. Due to its vertically built-in enterprise mannequin, it enjoys vital synergies.
Supply: Investor Presentation
Its midstream and downstream companies present a powerful buffer when the worth of pure fuel decreases. Furthermore, the corporate enjoys greater returns on its investments, as each its upstream and midstream divisions profit from its investments in manufacturing development tasks.
In early August, National Gasoline Fuel reported (8/5/21) monetary outcomes for the third quarter of fiscal 2021. The corporate grew its manufacturing by a powerful 48% over last yr’s quarter, primarily because of the acquisition of Appalachian belongings. As well as, the common price of pure fuel rose 15%, from $1.92 in final yr’s quarter to $2.20.
In consequence, adjusted earnings–per–share grew 63%, from $0.57 to $0.93, and exceeded analysts’ consensus by $0.11. This confirms Nationwide Gasoline Fuel’ superior enterprise mannequin in comparison with different commodity producers.
Nationwide Gasoline Fuel pursues development by rising its pure fuel manufacturing and increasing its pipeline community. Nonetheless, it has grown its earnings per share at a median annual price of solely 2.9% since 2010. This can be a stern reminder of the sensitivity of the earnings of the corporate to the prevailing costs of pure fuel.
However, the corporate has promising development prospects forward.
Supply: Investor Presentation
A serious development driver might be a extra favorable enterprise atmosphere, as the worth of pure fuel has loads of potential upside and restricted draw back in the long term from its present suppressed degree.
Due to a steep enhance in output, firm management raised its steerage for a fourth consecutive quarter because of favorable commodity costs. It now expects earnings–per–share of $4.05–$4.15 (vs. earlier steerage of $3.85–$4.05), for 40% development on the mid–level.
It additionally initiated steerage for earnings–per–share of $4.40–$4.80 in fiscal 2022, implying 12% development on the mid–level, because of an improved outlook for pure fuel costs and the completion of the FM100 enlargement mission.
General, we anticipate Nationwide Gasoline Fuel to develop its earnings per share by about 4.0% per yr on common over the subsequent 5 years, primarily because of manufacturing development and considerably extra favorable costs of pure fuel sooner or later.
Aggressive Benefits & Recession Efficiency
As talked about above, the upstream section generates over 40% of its complete EBITDA, with pure fuel comprising 90% of the full output. It’s evident that the corporate is very delicate to the worth of pure fuel. This sensitivity was obvious in 2015 and 2016, when the worth of pure fuel collapsed and the corporate posted hefty losses.
However, because of its vertically built-in enterprise mannequin, Nationwide Gasoline Fuel is extra resilient to downturns than most oil and fuel producers, as its midstream and utility companies present a powerful buffer throughout downturns.
The superior enterprise mannequin of Nationwide Gasoline Fuel helps clarify its admirable dividend development file. The corporate has paid uninterrupted dividends for practically 120 consecutive years and has raised its dividend for 51 consecutive years. That is a powerful achievement for a commodity producer, as commodities are notorious for his or her excessive cyclicality, which leads to dramatic boom-and-bust cycles.
Given the wholesome payout ratio of 44% (based mostly on anticipated 2021 adjusted EPS) and the respectable steadiness sheet of the corporate, the dividend will be thought of protected for the foreseeable future. We anticipate Nationwide Gasoline Fuel to proceed elevating its dividend for a lot of extra years.
Valuation & Anticipated Returns
Nationwide Gasoline Fuel is at the moment buying and selling at 13.7 instances its anticipated earnings of $4.05 per share this yr. This earnings a number of is way decrease than the typical price-to-earnings ratio of 17.5 during the last decade. Our honest worth estimate for NFG inventory is a P/E of 15. If the P/E a number of expands from 13.7 to fifteen by 2026, it might raise annual returns by 1.8% per yr over the subsequent 5 years.
Given 4% anticipated earnings-per-share development, the three.3% dividend and a 1.8% annualized enlargement of the price-to-earnings ratio, we anticipate Nationwide Gasoline Fuel to supply a 9.1% common annual return over the subsequent 5 years. This makes the inventory a purchase in our view.
Nationwide Gasoline Fuel is very delicate to the gyrations of the worth of pure fuel. However, its midstream and utility segments present a powerful help to its monetary outcomes throughout downturns.
General, the midstream and utility segments present dependable money flows whereas the upstream section affords vital development potential because of robust manufacturing development and a possible enchancment within the worth of pure fuel off its present suppressed degree, which has been attributable to the pandemic.
As well as, Nationwide Gasoline Fuel inventory is undervalued proper now. Due to its promising development prospects, its 3.3% dividend, and its low valuation, we imagine the inventory is prone to provide engaging returns going ahead.
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