Northwest Natural Gas Co (NYSE:NWN)
Northwest Natural Gas Co (NYSE:NWN) is a archetype of a strong income play for retirement portfolios. This natural gas storage and distribution company boasts 57 consecutive years of dividend increases, yet it still pays a high dividend yield of 4.2%, which is a whole 120 basis points above its peer group average yield. Testifying to the strength of its earnings is the fact that after so many years of consecutive dividend growth, the stock has a payout ratio of 81%. Its dividend growth over the past five years averaged 4.1% annually; however, future dividend increases will likely track EPS growth rates, as the current payout leaves little room for the payout ratio expansion. With a forecast 3.8% EPS CAGR for the next five years, inflation-beating dividend growth looks most likely. The stock has an exceptionally low beta of only 0.33, assuring low variability of returns relative to the market’s.
What bodes well for this utility company is its constructive regulatory environment, which includes margin stabilization that increases stability of earnings and cash flows. Like other utilities, Northwest Natural Gas Co (NYSE:NWN) has low operational risk, and is focused on stabilizing earnings through regulation, reducing costs, and adding growth initiatives in utility facilities, storage and other natural gas infrastructure. To aid that process, the company introduced three key regulatory mechanisms, including decoupling, weather normalization and the system integrity tracking. This comes on the heels of an EPS downtrend amidst the falling price of natural gas since 2008, which in turn has produced substantial savings to clients, to the tune of $400 million over the past four years or so. At the same time, the customer count has been increasing.
The company holds investment grade ratings and boasts a balance sheet characterized by expanding assets and net worth. With large storage capacity and transport network, this company is well positioned in the natural gas complex to benefit from the low-cost natural gas supplies. The company’s competitive advantage is substantial savings realized relative to alternatives, such as oil (70% savings) and electricity (60% savings in high-growth areas).
United Bancshares, Inc. (NASDAQ:UBSI)
United Bancshares, Inc. (NASDAQ:UBSI) is a strong example of a financial stock sustaining dividend payments through both good and bad times. This bank holding company with a market cap of $1.3 billion, reached 39th year of consecutive annual dividend increases last year, the track record that only one major U.S. banking corporation can match. The bank’s yield of 4.8% on a payout ratio of 71% of the current-year EPS estimate and the historical dividend growth of 9.0% over nearly four decades are reflections of the bank’s robust financial performance over those past few decades. In fact, the bank’s low credit costs and its operational efficiency have enabled it to sustain profitability even during the credit crisis.
The bank has strong asset quality that outperforms the asset quality metrics of its bank peers. The bank is also well capitalized, with risk-based capital ratio of 13.8% (versus a 10% requirement), Tier I capital ratio of 12.6% (more than double the required 6.0%), and leverage ratio of 10.8% (versus the required 5%). The bank has completed some 28 mergers and acquisitions since 1982, and is in the process of acquiring Virginia Commerce Bancorp.
This deal will position United Bancshares, Inc. (NASDAQ:UBSI) in a leading position as the largest independent banking franchise in Northern Virginia and Washington, D.C. markets. The markets are characterized by high population and income growth. The deal will result in accretion to first full-year earnings and will result in double-digit internal rate of return in excess of United Bancshares’s cost of capital. All this will support a continued EPS expansion and dividend growth. United Bancshares is showing improved profitability, as its return on average assets (1.05%) and return on average equity (8.72%) are marginally higher than a year earlier.
NorthWestern Corp (NYSE:NWE)
NorthWestern Corp (NYSE:NWE), a diversified natural gas and electric power utility company has paid dividends since 2008 and has raised them each year since the first quarter of 2009. As it is the case with other regulated utilities, this fully regulated utility has cash flow stability that supports dividend stability and sustainability. The company is predominantly an electricity provider (78% of gross margin) and is 83% residential customer-oriented. Currently, it is paying a dividend yield of 3.7% on a payout ratio of 60% of the current-year EPS estimate, which leaves ample room for continued dividend growth.
The company’s investments are expected to yield average EPS and dividend growth of between 4.0% and 6.0% annually over the long run. Analysts are generally optimistic about the company, as they forecast a 5% EPS CAGR for the long term. Northwestern has already reached earnings and dividend growth momentum over the past five years, along with stronger cash flows due to net operating loss carry forwards that will aid free cash in the long run. In fact, this utility company is one of the few utility sector players with positive free cash flow balances, which bodes well for the utility’s future capital spending on growth.
Still, capital spending, excluding any supply capacity additions and distribution system infrastructure expansion, is expected to decline 23% by 2017. This will lend additional support to free cash flow, and, thus, to dividends.
A contribution to the company’s growth will also come from its recently announced agreement to purchase natural gas production interests in northern Montana’s Bear Paw Basin from Devon Energy, including Devon’s 82% interest in the Havre Pipeline Company, LLC. The deal will boost Northwestern’s owned supply for Montana retail sales of natural gas from the current 11% to 37%, helping reduce supply cost volatility and aiding the company’s long-term growth.
Final thoughts
In principle, stock investing for retirement requires conservative allocation of funds into equities that assure stable or consistently rising income streams with little volatility of price returns over time. Companies that are targeted usually have earnings consistency, which means they can thrive in any economic environment, and Northwestern, United Bancshares, Northwest Natural Gas Co (NYSE:NWN) and Essex Property Trust Inc (NYSE:ESS) are four worth watching. To discover more about Insider Monkey’s stock market strategies, continue reading here.
Disclosure: none
