Portfolio Update
The FiveTwenty portfolio received no dividends in the past week.
| Past Week Dividend | $0 |
| Current Quarter Dividend (Q3 2021) | $36.00 |
| LifeTime Dividend | $541.34 |
| Estimated Annual Dividend | $2,282.71 |
The capital allocation for the week of 08/01/2021 to 08/07/2021 will be used to establish a position in Southwest Gas Holdings (NYSE: SWX)
SWX – Company Profile
Southwest Gas Holdings (SWX), through its subsidiaries, purchases, distributes, and transports natural gas in Arizona, Nevada, and California. The company operates in two segments: Natural Gas Operations and Utility Infrastructure Services. As of December 31, 2020 the Natural Gas Operations business had 2,130,000 customers. Official Site | Wikipedia
| Dividend Streak | 15 years |
| Yield | 3.30% |
| Payout Ratio | 47.6% |
| P/E | 14.42 |
Financials
Does SWX have the financial means to sustain and raise its dividend going forward?
Over the last decade, SWX managed to steadily grow revenue and net earnings. Revenue grew from $1.887 billion in 2011 to $3.299 billion in 2020, which represents a CAGR of 6.4%. Net earnings increased from $112 million to $232 million over the same period, a CAGR of 8.43%. Growing net earnings faster than revenue bodes well for the sustainability of the dividend.
In the last 10 years, SWX increased EPS from $2.43 to $4.14. This represents a CAGR of 6.1% which lags behind both the revenue and net earnings CAGR. Because SWX has issued new equity to finance capital expenditures, an increase in the share count from 46 million to 57 million during that same time period is the reason for EPS growth rate lagging behind net earning growth rate.
The average dividend per share growth rate was 9.30% per year in the past 10 years and 5.20% per year in the past 3 years. (per GuruFocus) During the same period the payout ratio has expanded from a low of 40% in 2012 to just shy of 55% in 2020.
SWX in 2021 and beyond
For the first 3 months of 2021, SWX EPS of $2.03 an increase of 55% from $1.31 in Q1 of 2020. Net income for the period was $117.3 million up 62% from the $72.5 million the year before. The increase was driven by a significant increase in the natural gas operations and a significant decrease of the loss from the utilities infrastructure business. EPS were negatively impacted by the increase in share count to 57.6 million from 55.3 million.
Looking ahead, SWX expects full year EPS in the range of $4.00 to $4.20. For the longer term the company projects new equity issuances of $600 million to $800 million over the 3 years ending 2023 as well as a target dividend ratio of 55% – 65%. We will be looking for progress and any changes to this guidance in the upcoming Q2 2021 earnings report.
Valuation
Are we paying too much for SWX at the current share price?
In the last 10 years, SWX’s P/E ratio saw a low of 13 and a high of 28.28, with a median value of 18.1. (per GuruFocus) The current TTM P/E ratio of 14.42 is compares favorably to historical values. The P/E ratio closer to the 10 year low than the median suggests that the company is currently undervalued.
The current share price of $69.93 is 3.8% above the 50-day moving average and 5.6% above the 200-day moving average. Additionally, the share price is near the 75th percentile of the 52 week trading range.
Even though the share price has bounced back from the low $60 it traded for at the beginning of the year, we believe that it still offer an attractive valuation.
Yield
How does the current dividend yield for SWX compare to historical values?
In the last 10 years, the dividend yield for SWX has been in a range of 2.06% to 4.11%, with a median of 2.56%. The current TTM yield of 3.30% is significantly above the historical median.
The current yield provides a good opportunity of establishing a position in SWX at an above average yield.
Thesis
Why are we adding SWX to the FiveTwenty portfolio?
Since 70% of revenue coming from the highly regulated natural gas operations, SWX offers a highly stable business. In addition, over the last decade the company has demonstrated the ability to steadily grow revenue, net income and EPS. Furthermore, the utility infrastructure business provides an additional cash source for SWX that it can deploy to expand its rate base and fuel growth.
Like the other utility companies we added to the portfolio, we expect SWX to be a reliable source of growing dividends for years to come.
Additional Research
Photo by Charles Betito Filho on Unsplash
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