High yielding utility common stocks have become more difficult to find in recent years as stock prices have risen. And a number of companies are now focusing on share buybacks rather than increasing dividends, observes Roger conrad, editor of Conrad’s utility investor.
My cardinal rule is that high dividends don’t last long unless they’re backed by a healthy, growing business. And the best proof of that is an “A” or at worst “B” grade rating, as well as a steadily increasing payout.
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My favorites that meet these qualifications are a trio of mid-level energy companies currently in our portfolio of models that trade well under my most recommended entry points: Kinder Morgan Inc. (KMI), Pembina pipeline (PBA) and TC Energy (TRP).
These stocks have dragged on long enough that more than a number of investors have abandoned them altogether. But ironically, the burden of proof is increasingly on the bears as to why these companies continue to deserve such severely discounted valuations.
All three reported free cash flow after CAPEX and dividends at what is arguably a low point in the energy cycle for system volumes. And management has used that surplus to make their balance sheets the strongest in years.
As a result, there is virtually no risk of falling dividends, even though the yields are at historically high levels compared to other income investments. And all three are likely to increase payouts over the next 12 months.
The bearish case is that cash flow will dry up and asset values will decline as the world wears off fossil fuels, and in the meantime ESG-focused investors will be ditching their stocks.
The world, however, still lacks affordable alternatives to oil and gas, which arguably have yet to peak in demand. And the price cycle is now shifting upwards, as several years of record low investment increase supply scarcity even as demand recovers from the pandemic.
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This argues at a minimum for at least one other big party in oil and gas stocks that even ESG minds will need to find ways to participate. And these increasingly abundant companies still have decades to upgrade their systems to CO2 emissions. free alternatives, including renewable natural gas harvested from farms, blue hydrogen derived from fossil fuels, green hydrogen and even the elusive holy grail of low-cost carbon capture technology.
Since the start of 2020, more than 80 North American mid-size companies have reduced their dividends. In contrast, Kinder, Pembina and TC Energy increased their payouts while adding strategic assets through a combination of acquisitions and construction.
It’s as safe a test of utility-type resilience in a harsh environment as you’ll find in any industry. Kinder is a buy up to $ 22, Pembina under $ 38, and TC Energy is $ 50.
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