XLU - NorthWestern: An Underperforming High-Dividend Stock With A Muted Growth Outlook

Summary

• The Utilities sector has given back its 2022 gains in recent weeks.
• One firm with a focus on natural gas generation and a big dividend looks fairly priced, but its earnings growth prospects appear limited.
• NWE's chart is trendless over the long-term, and shares have been moving lower since early 2022.

The Utilities sector has pulled back sharply from its 2022 high, but the defensive group remains in an uptrend dating back to the lows of early 2022. The slow & steady niche of the S&P 500 is rather expensively priced, but there are some bargains out there. Moreover, you can capture strong dividend yields in Utilities.

One Nasdaq-listed name with clean energy operations in the upper Midwest and Mountain/West regions pays a big yield, but is it a buy now?

Utilities Trending Up, NorthWestern A Relative Loser

According to Bank of America Global Research, NorthWestern Corporation (NWE) is a public regulated utility that provides electricity and natural gas services throughout Montana, South Dakota, and Nebraska. The company generates and distributes electricity as NorthWestern Energy, with its main businesses segmented between electric operations and natural gas operations. The company's electric business represents 80% of total gross margin, with the remainder coming from gas operations.

The South Dakota-based $2.9 billion market cap Multi-Utilities industry company within the Utilities sector trades at a near-market price-to-earnings multiple of 15.9 using its last 12-month GAAP earnings. The firm pays a high 4.9% dividend yield, according to The Wall Street Journal .

Recent positive regulatory developments in Montana are a bullish tailwind for NWE, but downside risks include the potential for negative legislative rulings along with the possibility that rate changes will not be swift enough to recoup costs. Amid a volatile interest rate environment, financing costs for the utility could be particularly uncertain in the years ahead. Finally, wildfire and other natural disaster risks make future capex expenditures unknown.

On valuation, analysts at BofA see NorthWestern's earnings falling this year, but then rebounding modestly in 2023. The longer-term outlook into 2024 shows a very low EPS growth rate. All the while, though, NWE's dividend should be on the rise despite negative free cash flow.

With an attractive P/E multiple compared to some other Utility stocks, the firm's EV/EBITDA ratio is somewhat elevated given its D- growth rating by Seeking Alpha. Overall, the valuation picture is not all that compelling to me.

NorthWestern Earnings, Valuation, And Dividend Forecasts

Looking ahead, Wall Street Horizon shows an unconfirmed Q3 earnings date of Monday, October 24 after market close for NorthWestern. That's not all as the firm's management team is expected to present at the EEI 57th Annual Financial Conference in mid-November. Both corporate event dates could feature enhanced stock price volatility.

Corporate Event Calendar

The Technical Take

NWE has historically found support in the upper $40s. I went back 10 years to review the weekly price action on shares given the sideways price action for much of 2022.

After the stock broke below support in the $53 to $54 range just a few weeks ago, it retested long-term support just below $80 with success. Still, the bulls have their work cut out for them in order to get NWE back above not only the $53 to $54 zone but also to break the downtrend off the early 2020 peak. I see the trendless price action that has been ongoing for the better part of the past 8 years continuing until the stock climbs above, say, $63 on a weekly closing basis.

Given much better trends in the broader Utilities sector, NWE does not appear to be among the strongest charts in the space.

NWE Shares Trending Lower, But Holding Support

The Bottom Line

NorthWestern features a decent valuation, but negative free cash flow and a poor growth outlook make me hesitant about the stock. The kicker is a trendless chart on this underperforming Utilities sector player. I'd look for similar companies with better growth prospects.

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