At Sure Dividend, we believe the best stocks to buy and hold for the long-term have many things in common. The best dividend growth stocks have long histories of dividend increases, consistent profits with steady growth, and durable competitive advantages.
To find the best dividend growth stocks, we focus heavily on the Dividend Aristocrats, a group of 57 stocks in the S&P 500 Index with 25+ consecutive years of dividend growth. There is also an even more exclusive group called the Dividend Kings, which have raised their dividends for 50 consecutive years.
Companies that have maintained dividend increases each year, for multiple decades on end, have proven the ability to produce steady growth even during recessions.
For example, National Fuel Gas (NFG) has paid dividends for 117 consecutive years and has increased its annual dividend for 49 straight years. It should join the list of Dividend Kings next year, and we believe the company will continue to increase its dividend each year for many years to come.
Business Overview and Recent Earnings Results
National Fuel Gas Co. is a diversified energy company that operates in five business segments: Exploration & Production, Pipeline & Storage, Gathering, Utility, and Energy Marketing. The company’s largest segment is Exploration & Production. Investors should note that 90% of the production of National Fuel Gas is natural gas. National Fuel Gas was founded in 1902 and has grown to a market capitalization of $4.0 billion.
The company benefits from its large and high-quality assets. Its upstream operations generate 600 million cubic feet per day of natural gas production, from the high-quality Appalachia region in the Marcellus and Utica shales. Meanwhile, the midstream business holds daily pipeline capacity of 4.2 million dekatherms, while the company has a downstream utility business with 750,000 customers.
On October 31st, National Fuel Gas reported financial results for the fourth quarter of fiscal 2019. The average price of natural gas fell 8%, from $2.45 in last year’s fourth quarter to $2.26, after the effect of hedging. However, the company grew its production 8% sequentially (25% over last year’s fiscal fourth quarter) and grew its adjusted earnings-per-share 10%, from $0.49 to $0.54.
For the full fiscal year, production increased 19% to an all-time high of 211.8 Bcfe. Despite the suppressed natural gas prices, National Fuel Gas grew its adjusted annual earnings-per-share 3%. The record output provided a strong boost to the gathering segment, which offset the effect of lower realized natural gas prices. Management expectations call for adjusted earnings-per-share in a range of $3.00-$3.30 for the upcoming year.
We believe National Fuel Gas has positive growth potential moving forward. Its earnings growth has been limited in recent years by suppressed natural gas prices. But the company can generate meaningful earnings growth in the years ahead, even if natural gas prices remain flat, due to production growth. At the midpoint of guidance, the company expects exploration and production gathering revenues to increase roughly 10% in 2020, and each year through 2022.
National Fuel Gas pursues growth by growing its natural gas production and expanding its pipeline network. The company also has growth potential in midstream. National Fuel Gas has a project backlog exceeding $1 billion in pipeline and storage projects.
Competitive Advantages & Recession Performance
National Fuel Gas’ competitive advantage is its combination of regulated and stable businesses (like pipelines and utilities) with cyclical and potentially higher-growth sectors (like exploration & production). Its diversified business model provides the company with exposure to growth, while simultaneously offering steady profits during recessions.
National Fuel Gas generates growth from its exploration and production business during industry booms, but fares better than many other energy stocks during recessions, thanks to its more stable utility business. For example, while many exploration and production firms reported heavy losses during the Great Recession of 2007-2009, National Fuel Gas remained profitable throughout. The company reported diluted earnings per share of $3.18, $1.25, and $2.73 in 2008, 2009, and 2010 respectively. Its earnings per share declined significantly at the depth of the economic downturn, but the company remained profitable, which allowed it to raise its dividend each year.
And, its earnings recovered dramatically in 2010 and beyond as the broader economy recovered from the recession. This is how the company has managed nearly five decades of annual dividend increases.
One of the most attractive qualities of National Fuel Gas is its impressive dividend history. The company has paid uninterrupted dividends for 117 years, and has increased its dividend for the past 49 years in a row. Its most recent dividend increase was a 2.4% increase in June 2019. Such a long history of steady dividends and dividend growth indicate a shareholder-friendly company. Indeed, National Fuel Gas has paid over $3 billion in dividends to shareholders since 1970.
Moreover, its dividend payout ratio is sufficiently low to enable continued dividend growth even if earnings stall temporarily. Management has always targeted a dividend payout ratio around 50% in order to have a high margin of safety against the wide fluctuations of the price of natural gas. As the 3.7% dividend yield of National Fuel Gas is more than twice as much as the yield of the S&P 500 Index (at 1.8%), the stock may entice income-oriented investors. We believe the dividend is sustainable with room for future dividend increases, thanks to future earnings growth potential, as well as a modest dividend payout ratio.
National Fuel Gas is particularly attractive for income, considering the prevailing investing climate. Interest rates are declining, while U.S. stocks have rallied throughout 2019 to record highs. These characteristics make for a difficult environment for income investors. National Fuel Gas stock offers a relatively high dividend yield in relation to the broader S&P 500 Index, along with a bonus in the form of annual dividend increases.
National Fuel Gas has a long and impressive history of reliable growth and dividends. Despite operating in a cyclical industry, the company has displayed a remarkable level of consistency over the past several decades. Thanks to its integrated and balanced business model, it has the ability to generate steady profits, even during recessions. We expect the company to continue raising its dividend for many years to come. With a current dividend yield of nearly 4%, National Fuel Gas is an attractive stock for long-term income investors.
About the Author
Bob Ciura writes for Sure Dividend, a website focused on dividend investing