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

2023-09-12 07:05:00 ET

Summary

• Bankruptcy is a normal part of capitalism and can lead to the cleansing of inefficient companies.
• Utilities are the lowest risk sector, with a 66% smaller risk of a permanent 70+% loss in stock price than U.S. stocks in general.
• Right now, the market is fixated on higher interest costs hurting utilities. The market is missing something big, creating a coiled spring opportunity.
• Over 18 months, most utilities can pass on all higher costs to customers. The market looks out 12 months. Once rates stop rising, this sector is likely to pop.
• This article showcases two 5% yielding dividend king utilities, with 52 and 68-year dividend growth streaks, trading at the highest yields in 10 and 20 years, respectively. Both are solid utilities that have been around for nearly 150 years and have been raising dividends through much more extreme economic and interest rate conditions than this. Both could deliver Buffett-like returns through 2025 and more than triple over the next decade, about twice the return potential of the S&P 500.

If past history was all there was to the game, the richest people would be librarians." - Warren Buffett.

Financial science is like social sciences; there is logic to the mayhem, but it's not a hard science like physics or chemistry.

History doesn't repeat itself but it does rhyme" - Mark Twain.

For example, consider the 80% Templeton/Marks certainty limit.

Templeton concedes that when people say things are different , 20 percent of the time they are right." - Howard Marks.

This means that no matter how certain the data makes you feel about a company, including AAA-rated dividend aristocrat General Electric (GE) in 2000 after a decade of not missing earnings expectations, you must always assume a 20% chance that things will go badly in the future.

(Source: JPMorgan Asset Management.)

How on earth can the wheels fall off the bus so badly for 44% of companies that they suffer a 70+% collapse and never recover? A Japan-style stock meltdown for almost 50% of all companies?

That's the nature of capitalism.

"The process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one." Joseph Schumpeter.

Even 1 in 6 utilities suffers catastrophic declines, and its assets end up being eaten by stronger, better-run companies.

Do you know what 70+ % of permanent declines represent? Failed companies. The natural evolution of capitalism. Companies compete for resources, and some adapt successfully, and others fail to.

The strong survive, and the weak fall behind and die.

The ultimate example of a failed company is bankruptcy, when a business ceases to exist, and its assets are sold off for pennies on the dollar to stronger rivals.

Did you know the average forest has 300 miles of mycelium network per square foot?

Mycelium is a fungus's vegetative part, comprising a network of branching filaments. The mycelium network is responsible for absorbing nutrients from the soil and transporting them to the fungal fruiting bodies.

Mushrooms are what you see, but it's a small fraction of the actual organism

The mycelium network is a vast and interconnected system capable of learning, adapting, and communicating, a "living internet."

The number of connections between these fungal cells within a square foot is more than those in the human brain. Scientists estimate that a single gram of mycelium has about 100 trillion connections, equal to the human brain.

Malheur National Forest in Oregon, United States, has the largest mycelial network ever discovered. It covers an area of 2,200 acres (890 hectares) and is estimated to weigh over 35,000 tons (31,500 tonnes).

The mycelium of this fungus is estimated to contain about 3.8 trillion grams of fungal tissue. This is equivalent to the weight of about 100,000 elephants.

• 115 billion humans is the cumulative number of people estimated to have existed in all of human history
• The cellular connections of this fungi are equal to the brains of 33X all the humans who have ever lived.

These are fungi, the decomposers of the world, without which we'd be buried under dead trees and animals.

These create a fungal internet around the world that helps to create soil, trap carbon, and make life on Earth possible.

That is how you should think about bankruptcy, as normal, natural, and cleansing.

What happens if you don't cleanse? You get a buildup of inefficiency. You get buried under poor management and low productivity.

You get zombie companies that soak up resources, resulting in stagnant wage growth, stagnant corporate earnings growth, and terrible stock returns.

How To Tell The Difference Between A Zombie Company And A Buffett-Style "Fat Pitch"

In mid-2019, AbbVie (ABBV) was facing the Humira patent cliff of 2023 and had just made a $63 billion acquisition of Allergan, by far the largest in its history.

Much of that was debt, and Wall Street was nervous. Even though ABBV had growth earnings of 41% in 2018 and was expected to grow by 13% in 2019, the stock had been falling for 17 months.

It traded at a very safe 6% yield, a dividend aristocrat trading at 7X earnings, pricing in -3% growth rates forever.

Yet it was an investment-grade aristocrat growing at double-digits.

The bond market estimated a 3% chance of bankruptcy over 30 years, consistent with A- A-credit rating companies.

Management was bullish, analysts were bullish, rating agencies were confident, the bond market was confident.

All the actual data was positive confirming the expert consensus was right and Wall Street was dead wrong.

There was nothing wrong with AbbVie; this was not a value trap, a yield trap, or a broken company.

"The charts are terrible. Dead money" - Frequent comment in ABBV articles in August 2019.

I don't care about ugly charts; I care about fundamentals. If the fundamentals are strong, the stock is a good buy, and the case closed.

"I can say with 80% statistical confidence that anyone buying Company X will be very happy they did in + years."

DK First Recommended ABBV August 5th 2019

4 years later ABBV has almost tripled, delivering 27% annular returns. Remember those "Buffett-like returns from blue-chip bargains hiding in plain sight?" I'm always going on about?

Well, there they are. You didn't even have to buy ABBV at the very bottom.

1 Year Off The Bottom And You Still Earned 20% Annual Returns

One year after it bottomed, you could have still locked in Buffett-like returns on a high-yield dividend aristocrat (now king).

Today, I want to highlight two more dividend kings with 52 to 68-year dividend growth streaks that are trading at 52-week lows and are not broken.

Buffett-style fat pitches for low-risk utilities are a potentially wonderful defensive buy going into the 2024 recession.

Why Black Hills And Northwest Natural Are Potentially Great Buys Today

Black Hills Corporation ( BKH ) and Northwest Natural Holding Company ( NWN ) are two dividend king utilities that have been beaten down bargain opportunities.

• Why I Believe Black Hills Corporation Stock Is A Buy Now
• Northwest Natural: Buy A Dividend King Utility With A New Growth Plan

BKH was founded in 1883 and is an electric and gas utility for Colorado, Montana, South Dakota, Wyoming, Iowa, Kansas, Nebraska, and Arkansas.

NWN was founded in 1859 and is an Oregon nature gas utility.

• One of the first gas utilities in America.

These companies are built to last, and their fundamentals are rock solid, despite what the stock price might have you believe.

What explains a 30% to 35% bear market in these dividend king utilities that began in mid-2022? Record low-interest rates normalizing due to the worst inflation in four decades.

Inflation has come way down from its peak but remains at higher levels than the Fed would like.

The age of 0.5% long-term yields is gone forever, and thank god for that. Do you know what keeps zombie companies alive? Free money forever.

If you want a vibrant economy, you need money to cost something.

You need real positive interest rates for capitalism to function properly.

Right now, investors have gone 180 on utilities.

In August 2022, utilities traded at 22X earnings as a sector, the most overvalued in history.

Free money forever and an expected recession in 2023 meant "no price too high" for this slow-growing but defensive sector.

Even Wall Street fund managers admitted that these valuations made no sense, but "in the next year, we think long-only fund managers will have to buy something, and they will buy utilities."

So, the "greater fool theory" of investing then.

It's OK to pay 21X earnings for BKH, which normally trades 17.5, because some idiot with too much money will pay 23X in a year.

Guess what? Rates went up, and we ran out of greater fools to keep utilities levitating higher. Now, Wall Street hates utilities because rates have gone up.

What Is The Catalyst? Why These Coiled Springs Might Pop Soon?

Wall Street's same terror over soaring interest rates is the natural catalyst for an undervalued sector (the lowest risk of permanent catastrophic decline of any sector) to recover.

25% Annual Return Potential Through 2025 On NWN

NWN has a steady growth of 5% to 6% expected going forward and a safe 5.2X debt/EBITDA ratio (5.5 is safe for utilities). Next year, it's expected to fall to 5X.

NWN's dividend growth has been token 1% for years due to its need to bring down the payout ratio from 86% in 2014 (due to some acquisitions) to a safe 71% next year.

The leverage ratio was also decreasing as management balanced growth with dividend safety and dependability.

Just as they have been for 68 years, tied for the longest growth streak of any company in America.

• dividend growing every year since 1955.

Are you worried about 10-year yields going higher than 16%? Because NWN was growing its dividend during rates that high.

Are you worried about the Fed going to 20% or above? Because NWN was raising its dividend during 20% rates under Volker.

Worried about a mild recession in 2024? Guess what? When the economy was shutdown in 2020 we faced the worst economic contraction in US history.

NWN kept raising its dividend. Also, the Financial Crisis, 9/11, the tech crash of 2000, and dozens of other horror show events of the last 68 years.

Unless you think Portland is about to be nuked by Russia (2.5% risk, according to Goldman), there is no reason not to buy NWN right now, assuming you are comfortable with the risk profile.

The Highest Yield In 20 Years

If you want a safe 5% yield with steady growth of 4% to 5% long-term there hasn't been a better opportunity in 20 years.

If you don't want to buy NWN today, you just don't want to own this dividend king ever (perfectly fine if you don't).

• If not now, then when?

The Last Time NWN Was This Undervalued

(Source: Portfolio Visualizer Premium.)

NWN is a slow-growing utility (most of the sector is). You're not going to get Buffett-like returns forever from any utility (with rare exceptions).

What kind of return can you get from NWN?

Fundamental Summary

• DK quality score: 98% high risk 12/13 blue-chip dividend king
• DK safety score: 100% (1% severe recession cut risk)
• Current price: $39.31
• Historical Fair Value: $54.45
• Discount: 28%
• DK Rating: potential strong buy
• Yield: 4.9%
• LT growth consensus: 4.4%
• LT total return potential: 9.3%
• 10-year valuation boost: 3.3% CAGR
• 10-year consensus total return potential: 12.6% CAGR = 228%.

The S&P 500's 10-year consensus return potential is 130%.

How would you like to earn a safe 5% yield today, Buffett-like returns over the short-term and more than triple your money over the next decade and almost double the market's returns?

That's what NWN is potentially offering now.

Black Hills: There's Gold In Them Thar Hills!;)

• Why I Believe Black Hills Corporation Is A Buy Now

Black Hills is at a 10-year high yield, the best time in a decade to buy this 140-year-old dividend king.

That's seven generations of Americans who worked for and built this hidden gem income legend to its current greatness.

BKH recently cut guidance for 2023 due to rising interest and natural gas costs. Worse yet, it has to cover these rising costs with short-term debt, which is the most expensive right now.

But here's what Wall Street is missing. The company can pass on those higher costs to consumers as a regulated utility, with a 12 to 18-month lag.

Wall Street looks ahead 12 months, and BKH is in for a tough 18 months. That means about six months of likely continued weakness before this coiled spring pops, and you can earn returns like this.

17% Annual Return Potential Through 2025 On NWN

This is not a risk-free utility, there are no such things. 14% of all utilities turn out to be disasters.

Due to higher interest costs, management is cutting its growth guidance from 5% to 7% (6% midrange) to 4% to 6% (5% midrange).

Analysts expect 4.6% long-term growth so a bit more conservative than that.

But here's what any BKH bulls should focus on. BKH has one major growth catalyst, which is regulators are its friends. Regulators want carbon reduction, and by 2040, BKH plans to reduce CO2 emissions by 70%.

Any spending it does to achieve that gets passed onto consumers and gets a solid return on top.

The green energy transition will cost a lot, and that's what Wall Street is worried about right now. But in truth, with any regulated utility, cost = profit.

The more cost there is, the more profit there is in the future.

Wall Street isn't willing to see that, focusing on the short-term interest rate pain. But within about six months, it should be looking beyond the pain to the long-term gain, and when it happens, BKH is likely to take off like a rocket.

The Last Time BKH Was This Undervalued

(Source: Portfolio Visualizer Premium.)

BKH can deliver 11X returns over 15 years if you buy it cheaply. It's not undervalued today, but it still offers solid return potential, some of the best of any high-yield dividend king.

What kind of return can you get from BKH?

Fundamental Summary

• DK quality score: 97% medium risk 12/13 Super SWAN dividend king
• DK safety score: 100% (1% severe recession cut risk)
• Current price: $54.11
• Historical Fair Value: $73.85
• Discount: 27%
• DK Rating: Potential strong buy
• Yield: 4.6%
• LT growth consensus: 4.6%
• LT total return potential: 9.0%
• 10-year valuation boost: 3.2% CAGR
• 10-year consensus total return potential: 12.2% CAGR = 216%.

The S&P 500's 10-year consensus return potential is 130%.

Bottom Line: Never Forget Aristocrat Bargains Are All Around You

It's easy for high-yield income investors to lose focus in a market so dominated by the magnificent seven.

Don't even think about the magnificent seven and what they are or aren't doing.

If you're a smart income investor, you're playing your own game, focused on your goals, not scoring points to impress your friends at dinner parties.

NWN and BKH are two 5% yielding dividend kings trading at 52-week lows, largely due to worries about interest rates.

Remember that within 18 months of higher rates utilities are usually able to recoup all of those extra costs.

This makes utilities a potentially wonderful opportunity right now. The market looks forward to 12 months. It takes 18 months to recoup higher-rate expenses.

Six months after rates stop rising, Wall Street will likely recognize the opportunity, and the valuation gap will close. Coiled spring utilities like these will likely snap upwards, and momentum traders will then "like the charts" again, and they could once more become overvalued.

The bond market says the Fed is done hiking and that long-term rates are at cycle highs.

The downside risk from here is minimal, and the upside potential is Buffett-like in the next two years and a potential triple in the next decade.

All from two dividend king utilities with the best yields in 10 and 20 years, respectively.

For further details see:

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