OGE - OGE: Looks A Bit Expensive But May Be Good As A Safe Haven Play

2023-10-20 14:57:24 ET

Summary

• OGE Energy Corp. is a regulated electric utility serving Oklahoma with a high dividend yield of 4.91%.
• The company has shown resilience in its revenue and operating income growth despite economic events like the pandemic and declining real consumer income.
• OGE Energy's customer base is likely financially stable due to the state's reliance on agriculture and energy industries, making it a potential safe haven investment.
• The company is positioned to deliver a total average annual return of more than 9%, which is reasonable for a safe haven.
• The stock may be expensive today relative to its peers.

OGE Energy Corp. ( OGE ) is a regulated electric utility that serves much of the state of Oklahoma:

This is an area of the country that may be overlooked by many participants in the market, as Oklahoma is not a particularly heavily populated area nor is it a state that shows up very often in the national news. However, that certainly does not mean that the state has no opportunities for money-making opportunities, and OGE Energy may present one such opportunity. The company boasts a very attractive 4.91% yield at the current price, which is substantially above the 2.97% yield of the iShares U.S. Utilities ETF ( IDU ). The fact that agriculture and energy production are two of the largest industries of the economy of Oklahoma may also position the company's customer base quite well to ride through any near-term problems with the economy, as neither of these two industries is especially hurt by either rising interest rates or a slowdown in consumer spending.

As regular readers may no doubt be aware, I last discussed OGE Energy on August 16, 2023. Since that time, the stock has performed surprisingly well for a utility. OGE Energy's stock price has risen slightly, during a period of time in which both the S&P 500 Index ( SP500 ) and the U.S. Utilities Index have declined:

This is curious, as rising yields would normally be expected to cause a utility company's stock to decline. That is exactly what we see with respect to the index. However, that did not happen in the case of OGE Energy, and the company has had no significant company-specific developments that could explain its overall strong performance. As is usually the case with companies like this, slow and steady has been the mantra and the only significant thing that happened is that the company increased its dividend. This may have been enough to keep it from declining too much since the yield of the stock was higher following the increase, but that is by no means certain.

Unfortunately for potential investors, the stock still appears to be rather expensive relative to its peers, as it was the last time that we discussed it. However, that does not mean that it is a bad opportunity for investors, so let us investigate further and see if a good purchase case can be made here.

About OGE Energy

As mentioned in the introduction, OGE Energy Corp. is a regulated electric company that serves customers over most of the state of Oklahoma. That is far from the most populated state in the nation, in fact with a population of just over four million, it only ranks 28th in the nation. However, as is the case with neighboring Texas, the state's population has been growing at a fairly rapid rate in recent years:

According to the U.S. Census Bureau, the population of Oklahoma is currently growing at a 0.71% rate. This has proven to be a benefit for OGE Energy, as the company has seen its own customer count increase over the past few years. In fact, the utility has managed to grow its customer base at a faster pace than the population of the state itself:

This is quite beneficial for OGE Energy. This comes from the fact that the company is a regulated utility, so it is generally confined to a single geographic area in which it enjoys monopoly status. This means that the only way that the company can grow its customer base is if the population of its service territory grows with the passage of time. As we can see, that has clearly proven to be the case, as the company's customer base has been increasing at a rate between 1.0% and 1.4% since 2020. This means that the number of people who are paying the company for electric service has been increasing over time. All else being equal, this should cause the company's revenue to grow. That means that the company has more money available to cover its fixed expenses and ultimately makes its way down to profits and possibly into the pockets of the shareholders.

We can, in fact, see that OGE Energy's revenues have been growing over time. Here is the company's total annual revenues for each of the past ten years, as well as its revenue over the twelve-month period that ended on June 30, 2023:

Unfortunately, we do see that the revenue growth has not been perfect, as there were a few years that came in weaker than the previous period but for the most part, the company's growth remained on track, and it did manage to increase its revenue over the course of the decade. We certainly do not see anything resembling a rapid-growth company as the rate of increase here was pretty low, but this is a utility company so that is what we generally expect.

Naturally, though, the company's ability to turn its revenue into profit is somewhat more important than just the amount of money that comes in through the company's door. In this respect, OGE Energy proves to enjoy a great deal of stability over time:

We can see that the company managed to grow its operating income over time as well, but it was generally a pretty slow process to accomplish that.

The most important thing that we see above though is how limited of an impact various economic events had on the company. For example, the pandemic of 2020 appears to have had no effect on the company's operating income, as it still managed to deliver 4.81% year-over-year growth during 2020. Around the middle of 2021 and over most of 2022, we started to see a lot of stories in the mainstream media about how rising prices are hurting the budgets of consumers. Indeed, I even weighed in on that topic on occasion. After all, real disposable income did start to decline drastically in the middle of 2021:

This was obviously due to the fact that inflation was higher than wage gains during both 2021 and 2022 so consumers were forced to either tap their savings or borrow money to maintain their normal lifestyles. The other option, of course, was and is to cut back on discretionary spending. However, considering the American propensity for consumption, that final option was only a last resort for many households after their savings ran out and their credit cards became maxed out.

We can see that OGE Energy has proven to be resilient to all of these events that otherwise impacted the ability of consumers to spend, from the mass business closures of 2020 to the decline in real income. I explained why this is the case in a previous article on OGE Energy:

One of the characteristics of utilities like OGE Energy is that they enjoy remarkable financial stability. This is because of the fact that these companies provide a product that is generally considered to be a necessity for modern life. After all, how many people do not have electric service in their homes today? As such, most people will prioritize paying their utility bills ahead of discretionary expenses when money gets tight.

Earlier this week, Brian Moynihan, CEO of Bank of America ( BAC ), said that American consumers may have finally reached the "point of pain" as a combination of high credit card interest charges, rising inflation, declining savings, and stagnant real incomes puts pressure on consumers that could force them to stop spending on discretionary items. This echoes recent comments made by both Citigroup ( C ) and Barclays ( BCS ) that credit card spending declined last month. The retail sales report from the Commerce Department tells a different story, as it states that retail sales were up 0.7% in September. However, that was the result after the Commerce Department made "seasonal adjustments" to the figure. The actual unadjusted retail sales number was a 5.378% drop:

Whether you opt to believe the seasonally-adjusted retail sales figures or the unadjusted numbers is your decision, but the point is that there is definitely some reason to be concerned about American consumers at this point, and as consumer spending has been one of the last bastions of strength in the American economy, this could be a sign that a recession or economic slowdown could be approaching in the near future.

In the event of a slowdown, the location of OGE Energy's service territory could help insulate it beyond its simple status as a regulated utility. As mentioned earlier in this article, two of the largest industries in Oklahoma are agriculture and energy, so it is likely that many of the companies' customers derive their incomes from these two industries. That could prove to be a very good thing because people always need food and energy. This could mean that the companies' customers are much less likely to be affected by a recession than if its customers worked primarily in hospitality or retail such as would be found in a touristy area. Thus, in addition to the company's customers likely prioritizing paying their electric bills over other things when money gets tight, the customers themselves are likely to be quite stable as far as their personal finances are concerned. Thus, we can see some clear advantages to including OGE Energy in your portfolio as a "safe haven" investment.

Growth Prospects

As investors, we are unlikely to get excited about mere stability. After all, right now it is pretty easy to get a 5% yield simply by parking your money into an ordinary money market fund. There is not even a need to take on the risk of owning stocks in order to get that. Thus, there would be no reason to purchase shares of OGE Energy if all the company could offer you is a 4.91% dividend yield and stable earnings. Fortunately, the company is positioned to grow its earnings over time.

The primary way in which the company will grow its earnings is through the expansion of its rate base. I explained this concept in a previously published and linked article on OGE Energy:

The rate base is the value of the company's assets upon which regulators allow it to earn a specified rate of return. As this rate of return is a percentage, any increase in the rate base allows the company to increase the price that it charges its customers in order to earn that specified rate of return. The usual way that a utility will increase its rate base is by investing money into upgrading, modernizing, and even expanding its utility-grade infrastructure.

OGE Energy is planning to do exactly this, as the company has budgeted $4.75 billion to be spent over the 2023 to 2027 period on increasing its rate base. The company states that this should allow it to grow its earnings at a 5% to 7% rate over the period, although analysts are expecting a somewhat lower 3.65% earnings per share growth rate. The company's guidance would provide investors with a 10% to 12% average annual total return once the current dividend yield is taken into account. However, the lower figure that analysts are providing gives the company a projected 8.5% total average annual return. Honestly, either figure is fairly attractive in today's volatile and challenging market environment, especially for what is basically a safe-haven investment.

Valuation

According to Zacks Investment Research , OGE Energy will grow its earnings per share at a 3.65% rate over the next three to five years. This gives the company a price-to-earnings growth ratio of 4.63 at the current price. This is quite expensive relative to some of the company's peers:

We can see that OGE Energy appears to be incredibly expensive relative to its peers, although the company's forward price-to-earnings ratio of 16.89 is a bit cheaper than the broader S&P 500 Index. With that said though, the company might still make sense to slowly acquire at the current price considering that its dividend yield is actually above the ten-year U.S. Treasury right now and its customers are likely to be highly resistant to an economic shock.

In addition, if we use the company's own guidance with respect to its growth rate, that brings the price-to-earnings growth ratio down to 2.41 to 3.38, which compares reasonably well to the other companies on this list. Thus, the stock might not be as expensive as it seems to be.

Conclusion

In conclusion, OGE Energy has delivered a fairly impressive performance recently compared to many of its peers. This is probably due to the company's very high dividend yield and recent dividend increase that kept it competitive in a rising rate environment. Unfortunately, this has also resulted in the company looking incredibly expensive compared to its peers, as many of its peers have suffered from declining stock prices over the past few months. OGE Energy Corp. might still make some sense as a haven, though, as it should be able to weather any economic problems that could arise over the next year or so and the yield is sufficient to provide a decent return in the interim, especially as the company should be able to deliver at least some earnings growth.

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