Dividend Aristocrats In Focus: Atmos Vitality

Up to date on April twenty fifth, 2024 by Bob Ciura

The Dividend Aristocrats are a bunch of shares within the S&P 500 Index with 25+ years of consecutive dividend will increase. These firms have high-quality enterprise fashions which have stood the take a look at of time and proven a exceptional potential to lift dividends yearly whatever the financial system.

We’ve got compiled an inventory of all 68 Dividend Aristocrats, together with related monetary metrics like dividend yield and P/E ratios. You’ll be able to obtain the total Dividend Aristocrats checklist by clicking on the hyperlink beneath:

Disclaimer: Positive Dividend just isn’t affiliated with S&P World in any approach. S&P World owns and maintains The Dividend Aristocrats Index. The data on this article and downloadable spreadsheet relies on Positive Dividend’s personal evaluation, abstract, and evaluation of the S&P 500 Dividend Aristocrats ETF (NOBL) and different sources, and is supposed to assist particular person buyers higher perceive this ETF and the index upon which it’s primarily based. Not one of the info on this article or spreadsheet is official information from S&P World. Seek the advice of S&P World for official info.

The checklist of Dividend Aristocrats is diversified throughout a number of sectors, together with client items, financials, industrials, and healthcare. One group that’s surprisingly under-represented is the utility sector.

There are solely three utility shares on the checklist of Dividend Aristocrats: Consolidated Edison (ED), NextEra Vitality (NEE), and Atmos Vitality (ATO).

The truth that there are solely three utilities on the checklist could come as a shock, particularly since utilities are broadly thought to be being regular dividend shares. This text will focus on Atmos Vitality’s path to changing into a Dividend Aristocrat.

Enterprise Overview

Atmos Vitality can hint its beginnings all the best way again to 1906, when it was fashioned in Texas. Since that point, it has grown each organically and thru mergers. As we speak, Atmos Vitality distributes and shops pure gasoline in eight states, serving over 3 million clients.

As well as, Atmos owns about 5,700 miles of pure gasoline transmission traces. The utility ought to generate about $4.6 billion in income this yr. The corporate serves over 3 million pure gasoline clients unfold throughout eight totally different states.

Supply: Investor Presentation

Atmos posted first quarter earnings on February sixth, 2024. Earnings-per-share got here to $2.08, or $311 million on a greenback foundation. Capital expenditures for the quarter have been $770 million, with 82% of that capex being centered on security and reliability, with the steadiness on progress initiatives.

Atmos reaffirmed its outlook for $6.45 to $6.65 in earnings-per-share for this yr, and we’ve barely boosted our estimate for this yr to $6.60, up a dime from our preliminary estimate. The administration crew continues to count on 6% to eight% annual earnings-per-share progress, consistent with our estimate.

Progress Prospects

Earnings progress throughout the utility business usually mimics GDP progress, plus a few share factors. Nonetheless, we count on Atmos Vitality to proceed outperforming this development resulting from its deal with capital funding in its regulated operations, a constructive regulatory setting in Texas, and inhabitants progress.

Because of this, the corporate ought to profit from sturdy fee base progress, which in flip will generate annual earnings per share progress in accordance with administration’s 6% – 8% steering.

The expansion drivers for Atmos Vitality are new clients, fee will increase, and aggressive capital expenditures. One advantage of working in a regulated business is that utilities are permitted to lift charges regularly, which just about assures a gentle stage of progress.

Supply: Investor Presentation

The first threat going through the corporate is its potential to realize well timed and constructive regulatory fee changes. If the corporate achieved decrease than anticipated allowed returns, it may trigger important hurt to income.

Nonetheless, we imagine Atmos can obtain no less than 7% annual EPS progress through continued enhancements in gross margin, reductions in working prices as a share of income, and top-line progress by way of acquisitions in addition to natural buyer progress.

The corporate continues to file favorable fee instances with its numerous localities that present for small income will increase over time as properly, as we noticed once more in fiscal 2023 full–yr outcomes. 

Aggressive Benefits & Recession Efficiency

Atmos Vitality’s principal aggressive benefit is the excessive regulatory hurdles of the utility business. Gasoline service is important and important to society. Because of this, the business is extremely regulated, making it just about unattainable for a brand new competitor to enter the market. This supplies an excessive amount of certainty to Atmos Vitality and its annual earnings.

One other aggressive benefit is the corporate’s secure enterprise mannequin and sound steadiness sheet, giving it a pretty price of capital. This allows it to fund accretive acquisitions and progress capital expenditures, driving outsized earnings per share progress.

As well as, the utility enterprise mannequin is extremely recession-resistant. Whereas many firms skilled massive earnings declines in 2008 and 2009, Atmos Vitality’s earnings per share saved rising. Earnings-per-share through the Nice Recession are proven beneath:

2007 earnings-per-share of $1.91
2008 earnings-per-share of $1.99 (4% progress)
2009 earnings-per-share of $2.07 (4% progress)
2010 earnings-per-share of $2.20 (6% progress)

The corporate nonetheless generated wholesome progress even through the worst of the financial downturn. Outcomes remained resilient and continued to develop through the pandemic as properly, demonstrating the mission-critical nature of Atmos’ property.

This resilience has allowed Atmos Vitality to proceed rising its dividend annually throughout these unfavorable market environments.

Valuation & Anticipated Returns

Atmos Vitality is predicted to earn $6.60 this yr. Based mostly on this, the inventory trades with a price-to-earnings ratio of 17.8x. That is barely beneath our honest worth estimate of 19x earnings, which is barely beneath the 10-year common price-to-earnings ratio for the inventory.

Because of this, Atmos Vitality shares seem like undervalued. If the inventory valuation expands from 17.8 to 19 over the subsequent 5 years, the corresponding a number of growth would enhance annual returns by 1.3%. This might be a small headwind for future returns.

Happily, the inventory may nonetheless present constructive returns to shareholders, by way of earnings progress and dividends. We count on the corporate to develop earnings by 7% per yr over the subsequent 5 years.

As well as, the inventory has a present dividend yield of two.7%. ATO has elevated its dividend for 40 consecutive years.

Placing all of it collectively, Atmos Vitality’s complete anticipated returns may seem like the next:

7% earnings progress
1.3% P/E a number of growth
2.7% dividend yield

Added up, Atmos Vitality is predicted to generate 11.0% annualized complete returns over the subsequent 5 years, making the inventory enticing for buyers desirous about dividend progress and complete returns.

The dividend yield just isn’t substantial however stays enticing, whereas the dividend seems fairly secure. The corporate has a projected 2024 payout ratio of ~49%, which signifies a sustainable dividend. Because of this, we view Atmos Vitality as a blue-chip inventory.

Remaining Ideas

Atmos Vitality inventory is enticing for buyers on the lookout for an above-average yield and common dividend progress. Due to this, Atmos Vitality can serve a worthwhile goal in an revenue investor’s portfolio because the inventory affords a really safe and rising dividend revenue stream, and its dividend yield is properly above the common dividend yield of the S&P 500 Index.

Word: Atmos Vitality additionally ranks properly utilizing The Chowder Rule.

Atmos Vitality can also be a Dividend Aristocrat and may increase its dividend annually. With five-year anticipated returns of 11% per yr, ATO inventory is a purchase.

Moreover, the next Positive Dividend databases comprise probably the most dependable dividend growers in our funding universe:

If you happen to’re on the lookout for shares with distinctive dividend traits, take into account the next Positive Dividend databases:

The key home inventory market indices are one other strong useful resource for locating funding concepts. Positive Dividend compiles the next inventory market databases and updates them month-to-month: