WTRG - Buy These 5 Ridiculously Great High-Yield Dividend Aristocrat Bargains With Both Hands

2023-10-06 07:20:00 ET

Summary

• Long-term interest rates are soaring at their fastest rate in a quarter century. Rate-sensitive sectors are crashing like during the pandemic.
• Utilities are in their 4th worst bear market in 25 years. They have gone from 20% overvalued to 20% undervalued as a sector.
• Most utilities will be able to recoup higher rates via higher rates within 12 to 24 months. This is the best buying opportunity for utilities in years.
• Dividend aristocrat utilities are the most dependable dividend stocks on earth. 8 of the 51 dividend kings are utilities and the 2 longest dividend streak companies on earth are utilities.
• Here are the 5 most undervalued dividend aristocrat utilities, which yield a very safe 4%, are almost 30% undervalued, and could potentially double in the next two years, delivering 6X better total returns than the S&P 500.

Welcome to the great ratepocalypse of 2023.

In over 20 years, we've never had a quarter where long-term rates rose faster than in Q3.

As a result, utilities have been hammered, experiencing their 4th worst bear market in the last quarter century.

In fact, on Monday, October 2nd the entire utility sector fell 5% in a single day!

NextEra Energy ( NEE ) fell 9% in a single day. And no, the economy isn't in lockdown, the financial markets are melting down, it's just a spike in long-term interest rates that has popped a bubble.

37X earnings for a utility?!

The 10-year median P/E for utilities is 18.6, and at the peak of the utility bubble, the sector traded at 22X, an all-time high.

Today, utilities trade at 14.8X forward earnings, a 20% historical sector discount.

Utilities are the 3rd most undervalued sector!

For over five years, the sector was expensive, and now it's not.

If you're not excited about buying utilities, you forget the most important lesson between investing and speculation.

Only Speculators Hate Utilities Right Now

Short-term momentum traders, trying to score quick gains, are not the same as investors.

Smart long-term investors don't avoid buying a quality company at a historical discount just because of fear of further short-term losses.

Short-term prices are vanity, cash flow is sanity, and dividends are reality.

I understand how some utility, REIT, midstream, and yieldCo investors have suffered short-term losses and are shell shocked.

Let me ask you three questions.

• 1. do you own a quality company with growing sales, earnings, and dividends?
• 2. did you pay fair value or better?
• 3. did you buy it with good risk management in a diversified portfolio designed for your needs?

If you answer "yes" to all 3, then you have zero to fear from short-term price crashes.

Even if the thesis breaks down any single company you own, or even two or three, if you follow sound financial science principles like these, you are 97% likely to achieve your long-term financial goals.

Let me put it this way. What is the chance that you do everything right with your portfolio and then end up screwed in retirement? If you have a 30-year time horizon, including retirement itself? 3%.

What is the risk of nuclear war with Russia? According to Goldman Sachs, 2.5%.

So unless you're losing sleep over Putin and DC exchanging thermonuclear hydrogen warheads, if you are a smart long-term investor, you should never fear "catching a falling knife."

Finding The Best Dividend Aristocrat Utility Bargains

• It's The Best Time In 10 Years To Buy These 5% Yielding Dividend Aristocrats .

In this article, I explain why the market overreacts to soaring interest rates and their impact on utilities.

Some utilities will be screwed, such as Pinnacle West (PNW), where regulators are willing to put the screws to the company's requests for rate increases.

But most utilities? The ones we have in the DK Master List?

They can raise rates within 12 to 24 months and recoup higher interest costs.

Regulators ensure a certain profit margin for them; they are regulated monopolies with captive customers who will pay for those higher interest costs within 18 months of soaring rates.

The market is forward-looking by 12 months. So, within 6 to 12 months of peak interest rates, wherever that finally is, utilities are likely to start recovering.

And if the bond market is right and we have a 93% chance of recession next year? Then rates will start falling, and guess what is defensive and recession-resistant? Utilities!

Rising Rates + Steepening Yield Curve Is Called A Bear Steepener

Are utilities getting crushed in a bear steepener regime? That's not surprising.

But guess what comes next? A bull steepener.

• due to the recession caused by high rates.

What sectors do best in a recession? The defensive sectors that suck right now! I don't care what's falling now; I want to help you buy the stuff that will do well long-term but especially help you sleep well at night in the coming recessionary bear market.

But just in case you don't believe me, just in case you need a bit more SWANiness than our safety and quality scores, how about pure dividend aristocrat awesomeness:)

From 504 stocks in the Dividend Kings Master list to four 5+% yielding non-speculative investment grade, non-speculative REITs.

All in one minute, thanks to the DK Zen Research Terminal. This is how I find all my investment ideas.

OK, so let's look at the five most undervalued dividend aristocrat utilities to profit from the great ratepocalypse of 2023!

I sorted these by discount to fair value and have linked to articles for further research.

1. National Fuel Gas ( NFG )
2. Essential Utilities ( WTRG )
3. Northwest Natural Holdings ( NWN )
4. Black Hills Corp ( BKH )
5. NextEra Energy ( NEE ).

Fundamentals Summary

• yield: 3.9%
• dividend safety: 98% very safe (1.1% dividend cut risk)
• overall quality: 95% medium-risk 12/13 Super SWAN aristocrats
• credit rating: BBB+ average (good cost of capital) - 5.3% risk of bankruptcy over 30 years
• long-term growth consensus: 6.0%
• long-term total return potential: 9.9%
• discount to fair value: 28% discount (very strong buy) vs. 5% overvaluation on S&P
• 10-year valuation boost: 3.3% annually
• 10-year consensus total return potential: 3.9% yield + 6.0% growth + 3.3% valuation boost = 13.2% vs 10.1% S&P
• 10-year consensus total return potential: 246% vs. 162% S&P 500.

Historical Returns Since 1999

Can these aristocrat utilities deliver 10% long-term returns as analysts expect? It's what they have been doing for the last quarter century.

Consensus Total Return Potential Through 2025

• if and only if each company grows as analysts expect
• and returns to historical market-determined fair value
• this is what you will make.

National Fuel Gas

Essential Utilities

Northwest Natural Holdings

Black Hills Corp

NextEra Energy

S&P 500

S&P 2-year consensus total return potential: 15% or 7% per year.

Aristocrat utility bargains: 93% or 35% annually

6X the market's return potential in the next two years and twice the much safer yield.

Bottom Line: Buy These 5 Ridiculously Great High-Yield Dividend Aristocrat Bargains With Both Hands

Let's say that you're worried that higher for longer is the new normal.

Let's say you think the free money era since 2009 was a lie and that utilities are set for a major bear market that lasts for years.

Buying These Utilities Now Is Locking In Short-Term Profits; Just A Question of How Much

Even if you assume that utilities suffer lower PEs than during the last 20 years, which includes periods of higher rates than today, you're still not likely to lose money over the next two years.

Much less the next five years or ten years.

How confident am I that buying NFG, WTRG, NWN, BKH, and NEE will be smart in 5+ years? About 80%, the Marks/Templeton certainly limit on Wall Street.

That's "I'll die on this hill confidence" that anyone buying the highest quality, bluest of blue chip utilities right now will feel like a stock market genius by the end of 2028.

For further details see: