While the stock market has rebounded nicely from its March 23 low, we have to keep something in mind: The stock market is a market of stocks. The S&P 500 is made up of roughly 500 different stocks. And each stock represents equity in a specific business, with each business sporting unique dynamics.
Indeed, some individual stocks in the S&P 500 are still trading near their 52-week lows, either because they never rebounded in the first place, or because they dropped in price again.
But that doesn’t have anything to do with the valuation of individual stocks. Valuation has to be looked at on a case-by-case basis.
With this in mind, I want to share two high-quality utility dividend stocks that are trading near their 52-week lows.
These stocks could represent incredible long-term value.
Meanwhile, the combination of these two stocks gets you a yield of over 4%. That is more than twice the yield of that “expensive” market.
Utility stocks are great for dividend growth investors because you’re basically investing in local monopolies that are providing a service that people quite literally can’t live without. It’s money in the bank.
Now, I want to quickly mention something. I started my research for these companies on Sunday, June 28. Unfortunately, both of these stocks had a pretty big pop on Monday, June 29. That’s how it goes sometimes. Stocks go up and down every day. But both of these stocks still look like great long-term opportunities for dividend growth investors.
Let’s dig in.
The first stock I want to highlight is Avista Corp. (AVA). Founded in 1889, Avista is a utility company that provides electricity to nearly 340,000 customers and natural gas to about 300,000 customers across 30,000 square miles and four northwestern states: Montana, Idaho, Oregon, and Washington.
What’s particularly interesting about Avista is the makeup of their electricity generation mix. In an age where clean energy is all the rage and companies left and right are trying to refashion their business models, Avista has already stepped up to the plate. Approximately 51% of their electricity generation comes from hydro. That puts them in a pretty enviable position in terms of utility companies and carbon footprint.
Of course, what is really exciting about this company is the growing profit and dividends. Well, Avista delivers on both counts. Earnings per share has almost doubled over the last decade – up from $1.65 to $2.97 between FY 2010 and FY 2019. However, FY 2019 GAAP Earnings Per Share was positively impacted by a termination fee from Hydro One. Still, Avista shows slow, steady growth.
Meantime, Avista has increased its dividend for 18 consecutive years. The 10-year dividend growth rate is 6.7%, which is awfully nice when the stock already yields 4.6% as of the time of this video. That yield is significantly higher than the stock’s own five-year average yield of 3.3%. The stock is trading hands for under $36/share. It’s about 10% above the 52-week low of 32.09. Furthermore, it’s much lower than the 52-week high of $53.00.
The P/E ratio is just over 18, which is not bad at all for a quality utility yielding over 4.5%. For comparison, the stock’s five-year average P/E ratio is 21.2. The payout ratio, at 84%, is a tad high. Otherwise, the dividend metrics are great. I originally bought stock in Avista in 2012 for under $25/share. Then I sold those shares for over $50/share in mid-2017 after it was announced that Avista was being acquired by Canadian utility Hydro One.
However, that deal later fell through. And I recently decided to buy back into Avista after the stock cratered from the shock of the canceled deal.
The second stock I want to highlight is Black Hills Corp. (BKH). With roots dating back to 1883, they now provide energy to approximately 1.3 million natural gas and electricity customers in eight states: Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. Black Hills doesn’t have the hydro assets that Avista has; however, 86% of FY 2019 total revenues related to renewables, natural gas, and other services. And they’ve achieved a 16% CO2 reduction since 2005. Surprisingly, this utility stock flies way under the radar. But I’ll tell you why it shouldn’t.
Growth has been slow and steady, just like we see with Avista. Earnings per share climbed from $1.76 to $3.28 between FY 2010 and FY 2019.
Good stuff, but what’s really impressive here is the dividend growth. They’ve astoundingly increased their dividend for 49 consecutive years. That’s only one year away from becoming a Dividend King – which means 50 or more consecutive years of dividend raises. I don’t know of an electric utility with a longer dividend growth track record than this. The 10-year dividend growth rate is only 3.7%, but there’s been some dividend growth acceleration here. For perspective, the three-year dividend growth rate is 6.9%. That’s what you want to see.
This growth comes on top of a 3.9% yield. By the way, that’s almost 100 basis points higher than the stock’s five-year average yield. And with a payout ratio of approximately 70%, it’s highly likely that Black Hills will continue growing their dividend for years to come.
As I go to press, the stock is priced under $56/share. That’s about 16% higher than the 52-week low of $48.07. But check this out: The 52-week high for this stock is $87.12. We’re not even close to that. With a Price to Earnings ratio of just over 18, the valuation looks pretty attractive.
Every basic valuation metric you can throw at this stock is lower than its respective recent historical average. And the stock is obviously priced much lower than the broader market. I recently initiated a position in this stock. I’ve been wanting to invest in Black Hills for years. I finally saw an opportunity and took advantage. You might want to do the same.
— JasonDividends and Income - Free Newsletter [message from DTA]
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