2023-07-25 09:44:06 ET
Summary
- Black Hills Corporation is a Dividend King and has grown its dividends for 52 consecutive years.
- BKH has grown its dividends at a good 5%+ rate in the recent past years.
- BKH expects to grow its business at around 5%pa rate and continue to grow its dividends in line with earnings.
- BKH's dividend payout is relatively better among its peers with a healthy payout of less than 65% of earnings.
Black Hills Corporation (NYSE: BKH ) is a natural gas and electric utility company. They serve approximately 1.3 million customers in eight different states: Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. Some of the specific information related to BKH is given below:
Normally, I evaluate electric utilities using historical financial data and compare it among their peers before deciding which ones make the best investment at any specific time. This time, I chose the following companies for comparison:
Fair Price at the Historical Highest Dividend Yields:
The price of electric utilities generally fluctuates between highs and lows as the market rotates preferences owing to the economic situation. But I have noticed they generally follow a pattern in which the historical dividend yield of these companies tends to be range-bound. The best time to buy is when the dividend yield is near its historical high. I look up their historical price movements, including highs and lows in each dividend pay period over the past 10 years.
BKH comes out on top among the peers compared.
Fair Price Based on the Dividend Discount Model:
DDM (Dividend Discount Model) is a method of valuing a stock with the sum of future dividends discounted at a desired rate. I will use 10% (my expected market returns) as the discount rate. To compute future dividends, the dividend growth rate will also be input as an element for calculation.
BKH comes out after American Electric Power Company, Inc. ( AEP ), Xcel Energy, Inc. ( XEL ), and NextEra Energy, Inc. ( NEE ). The respective dividend growth rates made the mentioned peers come out on top. BKH, with a fair dividend yield growth rate, is not far behind. Recently, I wrote an article on AEP, which can be read here , when AEP's price was relatively more attractive for long-term purchases than current prices.
Fair Price based on dividend payback years:
I also evaluate electric utilities with the sum of the next 25 years dividend grown at its average historical growth rate adjusted for a fair present value or discounted at a fair average annual inflation rate of 5%.
Here again, AEP is ahead, but BKH is a very close second and far ahead of the rest of their peers.
Fair Price Based on Forward PE:
(Data compiled by the author, Fwd. EPS 2023 and 2024 taken from SA site)
Here again, BKH is a second behind Edison International ( EIX ) this time.
Average Fair Price Based on Various Models:
In addition to the above methods, utilities are considered safe when they near a 5% dividend yield. This is also added to the list of comparisons. Then the average of the above methods is computed as a fair and safe price for each utility.
BKH comes out on top among the peers compared, though it is still in the premium range. The safe price projected for BKH is around $55. Recently, BKH traded as low as $56.75, and then prices started moving higher. I have made several purchases for as little as $57.20. It is difficult to say when the lows occur. However, readers who follow me know that I indulge in short-term trading while also building a long-term position along the way. The lowest-cost buys will definitely stay in my long-term portfolio. I will continue to indulge in short-term trades with the intention of booking gains to adjust the net cash invested on BKH's yield as high as possible, preferably more than 10%.
In addition to historical data and future EPS projections, the following points can be considered before initiating a buy:
1) As of my writing, Dividend grades for BKH by Seeking Alpha Quant are as follows:
2) BKH is making significant advancements in their decarbonization journey to reduce electric utility emission intensity by 40% by 2030 and 70% by 2040, and to net zero in the natural gas utility distribution system by 2035.
3) BKH is a dividend king, having raised dividends for over 50 consecutive years.
4) The current dividend yield is an attractive 4%, which is one of the best among the electric utilities.
5) The dividend payout is less than 65% of their earnings, which is one of the best in the utility sector.
6) The historical dividend growth is at a healthy 5%+ per annum rate, which makes the dividend income grow well compared with inflation.
7) This is what the BKH management has to say in their last earnings report:
Rate revision approvals are generally specific to electric utilities. A recent rate revision approval-related news item is available. As per the BKH investor relations web site, the following information is positive going forward :
DENVER, July 18, 2023 (GLOBE NEWSWIRE) -- Black Hills Corp. ((NYSE: BKH)) today announced that its Colorado intrastate natural gas pipeline, Rocky Mountain Natural Gas LLC, doing business as Black Hills Energy, received approval from the Colorado Public Utility Commission of a settlement agreement for new rates to recover approximately $110 million of investments since 2017 in its 600-mile pipeline system.
“We are pleased to receive approval of a settlement that supports our long-term commitments to our Colorado customers and communities to deliver safe, reliable and cleaner energy service,” said Linn Evans, president and CEO of Black Hills Corp. “This pipeline supports our ability to safely transport natural gas to various delivery points throughout western Colorado and our commitments to reduce emissions through a more resilient and modern pipeline system.”
The approved settlement agreement will generate approximately $8.2 million of new annual revenues based on a weighted average cost of capital of 6.93% with a capital structure range of 50% to 52% equity, 48% to 50% debt and a return on equity of 9.50% to 9.70%. New rates were effective July 15, 2023.
While I mentioned the positive views, there are also negative views, which one should also consider. These are not specific to BHKs, and all utilities face these risks.
a) Any interest rate revision can hurt utility companies, including BKH which likely cannot escape this.
b) The looming recession, if it is severe, can affect all companies, and BKH won't be an exception.
c) Any future rate revisions not getting approved as expected can affect utilities.
Why one would buy the shares immediately or stagger the buys over the next month, expecting a lower price:
BKH will be coming out with quarterly results on August 2, 2023, after market close. The expectations are relatively low at this point in time.
The previous five-year price movement chart is as below:
Given the low prices and relatively good choice among peers, one could start buying ahead of the results. If the results happen to be better, with brighter next quarter projections, the price will not stay this low in my view. If we end up on the wrong side, prices can trend lower towards $55 after the results. Since I generally do short-term trading as well while the prices are low, I indulge in buying in this range with the intention of holding the lowest-cost buys for ever while trading out the higher-cost ones as and when they turn profitable relative to the period I hold in the trade bucket. You can make your decision to buy now or delay your decision until after the quarterly results. I wish you the best with whatever decisions you make.
For further details see:
Why I Believe Black Hills Corporation Is A Buy Now