2023-12-21 07:00:00 ET
Summary
- It's often said that it is better to give than to receive. After another 7% dividend boost, WEC Energy Group's Board of Directors is probably feeling mighty jolly right now.
- The electric and gas utility's diluted EPS moved higher in the third quarter by 4.2%.
- WEC Energy Group enjoys an A- credit rating on a stable outlook from S&P.
- Shares of the blue-chip utility appear to be priced at a 20% discount to fair value.
- WEC Energy Group could outpace the S&P 500 in the next two years and nearly double the index over the next 10 years.
The holiday season is in full swing, with Christmas Day just five days away. As I'm writing this right now, many families are undoubtedly participating in the tradition of stuffing stockings.
As a kid, I certainly remember the tradition with my now 85-year-old paternal grandmother and my grandfather. My grandma has also been my next-door neighbor my entire life. Just a small patch of woods separated us, so it was quite literally through the woods to my grandmother's house where I went. I recall visiting her frequently and still do to this day. This was especially the case at Christmas time when I would check my stockings almost every day.
I'll never forget that feeling of euphoria when I would pull a $5 bill, a $10 bill, or chocolate-covered cherries out of the stocking each season. True to the adage that it's better to give than to receive, I think my grandma and grandpa enjoyed it just as much or even more than myself.
Just today, WEC Energy Group (WEC) pulled off the corporate equivalent of a stocking stuffer. The company announced that it planned to up its quarterly dividend per share by 7.1% to $0.835 for the first quarter of 2024. For what it's worth, this was a notch above the 6.7% raise to $0.8325 that I was expecting.
As a shareholder, I couldn't be more pleased with the quality of this company. It also has to feel very good for WEC Energy Group's Board of Directors to deliver this good news to shareholders for the 21st consecutive year. For the first time since April 2022 , I will explain why I am upgrading the stock to a buy rating.
WEC Energy Group's 4.1% forward dividend yield is slightly higher than the 3.9% yield of the 10-year U.S. treasury. Besides this above-average starting yield, the company's dividend is arguably quite secure.
This is because, for one, WEC Energy Group's 68% EPS payout ratio is moderately below the industry-safe 75% EPS payout ratio that rating agencies like to see.
Secondly, the electric and gas utility's 51% debt-to-capital ratio is better than the 60% debt-to-capital ratio that rating agencies set forth as safe for utilities. This is why WEC Energy Group's credit rating is A- on a stable outlook from S&P. For context, that suggests the risk of the company defaulting on debt over the next 30 years is just 2.5%.
For these reasons, Dividend Kings pegs the probability of a dividend cut in the next average recession at merely 0.5% for WEC Energy Group. Even in the next severe recession, the risk as it stands now is only 1.5%.
WEC Energy Group's robust fundamentals aren't the only aspect of the company that I like. Based on its historical P/E ratio and dividend yield, Dividend Kings estimates the fair value to be $103 a share. Compared to the $82 share price (as of December 20, 2023), this would mean shares are trading at a 20% discount to fair value.
If WEC Energy Group grows as expected and returns to fair value, these are the total returns that could be in store for shareholders in the next 10 years:
- 4.1% yield + 6.4% FactSet Research annual earnings growth consensus + a 2.3% annual valuation multiple boost = 12.8% annual total return potential or a 233% 10-year cumulative total return versus the 8.6% annual total return potential or the 128% 10-year cumulative total return of the S&P 500 ( SP500 )
Another Solid Quarter For WEC Energy Group
When it released its latest earnings report on Halloween, WEC Energy Group's third-quarter financial results were anything but spooky. Sure, the company's operating revenue of just shy of $2 billion missed the analyst consensus by $30 million .
These results weren't indicative of any weakness on the part of WEC Energy Group. Rather, natural gas prices were much lower than they were in the year-ago period. This is what led regulated natural gas operating revenue to tumble 16.5% year-over-year to $437.4 million in the third quarter (details sourced from page 21 of 98 of WEC Energy Group's Q3 2023 10-Q filing ).
Favorable rate case activity and steady demand helped total regulated electric revenue edge 1.5% higher over the year-ago period to $1.5 billion during the third quarter.
WEC Energy Group's diluted EPS came in at $1, which was 4.2% more than in Q3 2022. Better yet, this beat the analyst consensus by $0.09. Drastically lower natural gas costs helped to offset lower operating revenue. This is what led the company's net profit margin to expand by nearly 110 basis points to 16.1% for the quarter.
Looking ahead, WEC Energy Group plans to invest $23.4 billion in capital projects to drive growth from 2024 to 2028. This is up meaningfully from the previous plan of $20.1 billion, with additional spending being allocated to electric generation in Wisconsin and Michigan, as well as American Transmission Company. Due to these capital projects, WEC Energy Group thinks it can compound diluted EPS by between 6.5% and 7% annually during that time.
As far as funding is concerned, the company also has the resources to execute these plans. That is because the vast majority of the costs will be funded from $17 billion in midpoint cash from operations. Most of the remainder will be predominantly funded by $7.5 billion in midpoint incremental debt, leveraging WEC Energy Group's A- credit rating from S&P. The minority of this remaining capital will come from a midpoint of $2 billion in share issuances.
A Dividend Aristocrat In The Making
With its most recent raise, WEC Energy Group is just four years away from becoming a Dividend Aristocrat.
The electric and gas utility will be slated to pay $3.34 in dividends per share in 2024. Against the $4.91 analyst consensus in diluted EPS for 2024, this would work out to a 68% payout ratio. That's squarely within the company's targeted payout ratio range of between 65% and 70% of earnings . This is why I would anticipate dividend growth of around 7% annually to persist for the foreseeable future from WEC Energy Group.
Risks To Consider
WEC Energy Group is a 13/13 ultra SWAN according to Dividend Kings' quality rating. Even so, the company has risks that investors must consider.
WEC Energy Group's operations are completely in Wisconsin, Illinois, Michigan, and Minnesota. This is important to note for at least a couple of reasons. For one, any particularly devastating natural disasters in these markets could inflict damage beyond what the company is insured for and disrupt its operations.
Additionally, WEC Energy Group must get rate cases approved by public utility commissions in these states periodically. If these rate case outcomes were to be unfavorable, it could weigh on the company's growth prospects.
An operating risk to WEC Energy Group is that its major projects could encounter cost overruns and time delays. If this happened, the company's financial results could be negatively impacted.
Summary: A Fair Price To Pay For A Superb Utility
WEC Energy Group's blended P/E ratio of 18.1 is in line with its normal P/E ratio per FAST Graphs. If the company grew as expected and its valuation remained about the same, it could generate 22% cumulative total returns through 2025. That would be considerably better than the 13% cumulative total returns expected from the SPDR S&P 500 ETF Trust ( SPY ) over that time. As WEC Energy Group has become more profitable since I last covered it and the share price has come down, that explains why I am upgrading it to a buy rating.
For further details see:
WEC Energy Group: Christmas Came Early With A 7% Dividend Boost