A Dividend Aristocrat, But Not for Long
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A lot has been written about the decrease in natural gas prices, which naturally led to an increase in demand for this fuel. One company that would seem to benefit from this shift in demand is Atmos Energy (NYSE: ATO). The company was recently named a dividend aristocrat for having increased its dividend at least 25 years in a row. Because these companies are a rare breed, I always try to determine if they can maintain their status or if they could be the next dividend blowup.
To understand how the market values Atmos, we first need to look at a few of their competitors to get an idea if there are better investment opportunities elsewhere. Two direct competitors of Atmos are ONEOK Inc. (NYSE: OKE) and Xcel Energy (NYSE: XEL). While both Atmos and Xcel are more diversified, and ONEOK is more focused on the natural gas industry, the three represent competing investment alternatives. Take a look at how the companies compare on several different metrics:
|
Name |
P/E |
Growth Rate |
PEG |
Yield |
|
Atmos Energy |
15.9 |
4.37% |
3.63 |
3.83% |
|
ONEOK |
25.9 |
13.19% |
1.96 |
2.69% |
|
Xcel Energy |
16.6 |
5.06% |
3.29 |
3.67% |
You can see that the higher growth rate of ONEOK also leads the market to value the stock more highly. However, Atmos and Xcel are more diversified and offer better dividend yields. Relatively speaking, it appears that ONEOK could be the best value as it has the highest growth rate, is relatively cheaper, and its yield is just about 1% less the other two companies. That being said, Atmos doesn't appear highly overvalued compared to similar utilities. If the company is trading for a reasonable valuation the next question is, can the company afford its current dividend?
The simplest way to tell if a company can't afford its dividend is to look at its free cash flow versus dividend payments. In the last four years, Atmos has generated $113.03 million in free cash flow and paid an average of $121.76 million in dividends. You can see right away that this could be a problem, as the company is paying out more than it is bringing in. Atmos has afforded these dividend payments by issuing debt and new shares. In fact, over the last four years, the company issued an average of $29 million more long-term debt than they pay back each year, and they issued nearly $18 million in new shares. While over a few years these trends are not a huge problem, continually issuing new shares dilutes existing shareholders. If the company has to continue issuing new debt, this adds to the company's interest cost and raises the level of risk. This is a red flag for investors and something to keep an eye on. With the current dividend's affordability in question, the next question is, what type of increases if any can investors expect in the future?
A trend that is both good and bad for Atmos investors is the predictability of the company's dividend increases. You can see over the last 5 years the clear trend that the company has established:
Keep in mind that this scale on this chart is only from 0% to 2% and you can see that the company's dividend growth is both very small and slowing down ever so slightly. In fact, the company is increasing its dividend by half a cent each year, so as the numbers get bigger, the growth percentage gets smaller.
My concern for investors is that the company is issuing new shares and debt in order to afford their current payments. If this trend continues, it should not be a surprise if the company has to stop increasing their dividend altogether. For this reason, investors should not expect dividend growth in the future, in my opinion. Considering the yield is less than 4%, there are many more attractive dividend payers in the market than Atmos. The company may be a dividend aristocrat for now, but without a major change in their cash flow, they are likely to drop off of this list.
MHenage has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend ONEOK. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
