NorthWestern: Steady Dividend With Potential Population Growth
Electric and gas utility stocks are typically used as income-oriented investments with their steady and essential source of monthly revenues from consumers and their high dividend yields. Yet utilities typically have low earnings growth rates. However, if a utility operates in an area with that is experiencing population growth, it may offer higher growth rates.
An example is NorthWestern Corp. (NASDAQ:NWE), which operates in the fast-growing region of Montana. The company is an electric and natural gas utility company operating in the Northwestern region of the U.S. Headquartered in Sioux Falls, South Dakota, the company operates primarily under the NorthWest Energy brand and serves approximately 743,000 customers across Montana, South Dakota and Nebraska.
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The company, which has a rich history dating back to 1923, currently has a market capitalization of $3.35 billion.
Business mix and population growth
The fastest-growing states over the 2020 to 2022 time period have been Idaho, Montana and Florida. Montanas population has grown from 990,730 in 2010 to approximately 1.12 million in 2022. South Dakotas population grew from 754,844 in 2000 to an estimated 909,824 in 2022 according to the latest report. These migration patterns are largely driven by people moving out of high cost states like California as well as the Covid-19 pandemic driving people to less crowded states. These trends are likely to continue as the exodus from high costs states shows no sign of abating.
NorthWestern provides both electricity and natural gas services to customers in Montana and South Dakota and natural gas services to customers in Nebraska. Approximately 85% of operating income comes from Montana and 79% comes from electricity-related services.
In terms of electricity generation, roughly 55% of total generation comes from carbon-free sources such as wind and hydro power. The other comes from natural gas and coal generation.
Financial review
The company reported first-quarter results on April 27. Net income was $62.5 million, or $1.05 per share, which compares to net income of $59.1 million, or $1.08 per share, in the prior-year period. The increase in net income was primarily due to higher electric and natural gas retail volumes and higher Montana interim rates associated with the companys ongoing rate review. This was offset by higher operating and maintenance costs, higher selling, general and administrative costs, higher depreciation expense and increased interest expense and taxes. Although net income increased by $3.4 million, diluted earnings per share decreased due to equity issuances during 2022 that increased average shares outstanding from 54.8 million to 59.8 million.
Total unrestricted cash at quarter end was $10.7 million and restricted cash was $16.4 million. Total outstanding debt was $2.6 billion, and shareholders equity was $2.7 billion. Operating cash flow for the quarter was $213.7 million and capital expenditures were $136.6 million. Uses of free cash flow included $38 million for dividend payments and $33 million to pay down debt.
NorthWestern CEO Robert Rowe summarized the quarterly results as follows:
First quarter earnings were in line with our expectations. Montana interim rates, customer growth and usage mitigated some of the inflationary and interest rate impacts we continue to experience. We made great progress on our Montana rate review during the quarter. Weve had a very constructive dialogue with the primary intervenors in our rate review docket and were pleased to reach a settlement agreement to present to the Montana Public Service Commission. If approved, the settlement balances the best interests of our Montana customers and our shareholders. Additionally, we also anticipate initiating an electric rate review in South Dakota mid-2023 to adjust rates to reflect the true cost of service and to seek recovery of investments made since our last review in 2015."
Valuation
The consensus analyst earnings per share estimate for 2023 is $3.46 and $3.59 for 2024. The stock is currently trading at 16 times earnings and has an enterprise value/Ebitda ratio of approximately 10.
The GuruFocus discounted cash flow calculator creates a value close to today's stock price using earnings per share of $3.22 as the starting point and a long-term growth rate of 6%.
Six Wall Street analysts cover the company with an average price target of $61, including a high target of $64 and a low target of $57.
Dividends are important for utility investors. The company currently pays an annualized dividend of $2.56, which equates to a yield of 4.56%. Utilities often pay a large portion of earnings in dividends and the payout ratio is approximately 70% on a forward-looking basis.
Summary
NorthWestern has established itself as a reputable electric and natural gas utility company in the regions in which it operates. It has a long-standing history and a strong customer base in a fast-growing region of the country. The company's healthy balance sheet and efficient debt management contribute to its financial stability and provides the ability to invest in necessary infrastructure upgrades.
For income-oriented investors, NorthWestern offers a steady dividend and solid mid-cap investment opportunity.
This article first appeared on GuruFocus.
