Written by Bob Ciura for Sure Dividend
Dividend Kings are ideal candidates for the portfolios of income-focused investors. These stocks have grown their dividends for at least 50 consecutive years and hence they are obviously resilient to recessions. They also enjoy significant competitive advantages and a meaningful moat in their business.
At the same time, commodity prices are rising recently due to inflation and geopolitical concerns.
In this article, we will analyze two Dividend Kings that greatly benefit from rising oil and gas prices, namely National Fuel Gas (NFG) and Emerson Electric (EMR).
National Fuel Gas (NFG)
National Fuel Gas is a diversified, vertically integrated, natural gas company. Its upstream segment (exploration & production) generates 46% of its EBITDA while its midstream segment (gathering, pipeline & storage) and its utility segment generate 38% and 16% of its EBITDA, respectively.
The energy market went through a fierce downturn in 2020 due to the coronavirus crisis, which caused a plunge in the global demand for oil products. However, the demand for natural gas remained firm, as a modest decrease in commercial demand was offset by an increase in residential consumption. As a result, National Fuel Gas has proved resilient throughout the pandemic.
Even better, the price of natural gas has rallied close to 7-year highs in the last six months thanks to strong demand amid low inventories. The low inventories have resulted primarily from the shift of energy companies from fossil fuels to renewable energy sources. This transition will take many years to materialize and, in the meantime, the inventories of oil products and natural gas have greatly decreased due to the natural decline of producing fields and the lack of new growth projects.
Moreover, National Fuel Gas enjoys strong production growth thanks to its high-quality assets in prolific areas, such as the Appalachia. In the first quarter of fiscal 2022, the company grew its production by 7% over the prior year’s quarter, primarily thanks to the development of core acreage positions in Appalachia. In addition, the price of natural gas rose significantly thanks to strong demand and tight supply. As a result, National Fuel Gas grew its adjusted earnings per share 40%, from $1.06 to $1.48, and exceeded the analysts’ consensus by $0.15. The company has exceeded the analysts’ estimates for 11 consecutive quarters.
Thanks to an improved outlook for natural gas prices and oil prices, management raised its guidance for the annual earnings per share of 2022 for a second time in a row, from $5.05- $5.45 to $5.20-$5.50, for 24% growth at the mid-point. Investors should also note that National Fuel Gas tends to issue conservative guidance in order to be on the safe side. Given the sustained rally in the price of natural gas and the conservatism of management, we expect the company to earn at least $5.60 per share this year. If this proves correct, it will mark 31% growth over last year, to a new all-time high.
On the other hand, investors should always keep in mind the sensitivity of National Fuel Gas to the cycles of the price of natural gas. Approximately 90% of the output of National Fuel Gas is natural gas. In addition, the Exploration & Production segment generates about half of the total earnings of the company. As a result, National Fuel Gas is highly sensitive to the swings of the price of natural gas. On the bright side, its pipeline & storage and gathering segments provide a meaningful buffer to the performance of the company during downturns.
National Fuel Gas also has an exceptional dividend growth record. It has paid uninterrupted dividends for 119 consecutive years and has grown its dividend for 51 consecutive years. It has thus has become the first energy company that belongs to the group of Dividend Kings.
Moreover, National Fuel Gas can easily continue raising its dividend for many more years. It has always targeted a payout ratio around 50% in order to have a wide margin of safety. It also has a solid balance sheet, with interest expense consuming only 21% of operating income. Given the current payout ratio of 33% and the healthy financial position of the company, it is evident that the 3.0% dividend of the stock is safe. Moreover, while the current dividend yield of the stock may seem lackluster to some income-oriented investors, it is more than double the 1.3% dividend yield of the S&P 500. Overall, National Fuel Gas is suitable for income-oriented investors who expect natural gas prices to remain strong for the foreseeable future.
Emerson Electric (EMR)
Emerson Electric was founded in 1890. Since then, it has continuously grown via strategic acquisitions and organically, from a regional manufacturer of electric motors and fans into a diversified global leader in technology and engineering, with a market capitalization of $56 billion.
Emerson generates a great portion of its revenue from the oil and gas industry. This industry drastically reduced its investment in new growth projects in the last two years due to the coronavirus crisis. Consequently, oil and gas producers will have to significantly boost their investment in new projects in the upcoming years to make up for the lost ground, particularly given the natural decline of existing fields and the sustained growth in the global consumption of oil and gas. Oil and gas prices have rallied to 7-year highs in recent months thanks to pent-up demand and low inventories. This trend will provide a strong tailwind to the business of Emerson, as it will lead producers to increase their production as well as their investment in new projects.
In the first quarter of fiscal 2022, Emerson grew its revenue by 8% over the prior year’s quarter and its earnings per share by 13%, from $0.93 to $1.05, thus exceeding the analysts’ consensus by $0.04. Notably, the company has not missed the analysts’ estimates for 13 consecutive quarters. Even better, thanks to its strong business momentum and its bright outlook, it raised its guidance for the annual earnings per share from $4.71-$4.86 to an all-time high of $4.90-$5.05. At the mid-point, this guidance implies 21% growth over the prior year.
Thanks to its decades-long experience, Emerson has built up unique expertise, customer relationships and reputation in its business. These features constitute key competitive advantages, which have helped the company raise its dividend for 65 consecutive years. This is one of the longest dividend growth streaks in the investing universe and a great achievement, especially given the cyclical nature of the industrial sector.
Moreover, Emerson is offering a 2.1% dividend. While this yield is uninspiring at first sight, the company can easily continue raising its dividend meaningfully for many more years thanks to its healthy payout ratio of 42%, its earnings growth potential and its solid balance sheet.
Final Thoughts
National Fuel Gas and Emerson Electric have admirable dividend growth streaks, especially given the cyclical nature of their business. In addition, both companies thrive in an environment of high prices of oil and gas. Therefore, they are potentially attractive holdings for income investors who are confident that oil and gas prices will remain elevated for the foreseeable future.
