If there’s anything I’ve learned in life, it’s the value of time.

We can always make more money; we can never make more time.

In fact, if you’re living and investing the right way, you can make a lot of money – money which can be used to “buy” time.

While I hesitate to ever call one way of investing “right” – there are so many different ways to invest, and all kinds of different strategies have merits that depend on one’s individual objectives – I’d argue that dividend growth investing is about as close as it gets for most investors.

That’s because of how it unlocks time.

See, dividend growth investing is all about buying and holding shares in world-class businesses rewarding shareholders with steadily rising cash dividends.

You can find hundreds of examples of what I mean by perusing the Dividend Champions, Contenders, and Challengers list – a compilation of US-listed stocks that have raised dividends each year for at least the last five consecutive years.

These growing dividends are hard evidence of the quality and durability of these businesses, as it’s pretty much impossible to consistently pay out ever-more cash to shareholders without generating the ever-more profit necessary to sustain that behavior.

These growing dividends are also key to “buying” time; once one has enough dividend income to live off of, they’re financially independent and able to take back and “spend” their time however they wish.

That’s the gift that keeps on giving.

I’ve experienced this giving gift myself over the past 15 years via the FIRE Fund – my real-money portfolio that pays me enough five-figure passive dividend income for me to live off of.

I’ve actually been in the extremely fortunate position of being able to live off of this dividend income since I pulled the trigger and retired in my early 30s.

How was I able to pull that off?

Well, my Early Retirement Blueprint explains.

A lot of my success came down to living below my means and then buying the right stocks at the right valuations.

That last part is an important distinction.

And that’s because price only tells you what you pay, but value tells you what you get.

An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.

This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.

Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.

That higher yield correlates to greater long-term total return potential.

This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.

Prospective investment income is boosted by the higher yield.

But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.

And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.

These dynamics should reduce risk.

Undervaluation introduces a margin of safety.

This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.

It’s protection against the possible downside.

We can’t make more time… but we can live below our means, consistently buy high-quality undervalued dividend growth stocks, achieve financial independence, and then use our newfound freedom to “spend” our now-available time however we wish to.

Now, the concept of valuation may seem daunting at first, especially if you’re not already familiar with it.

That’s where Lesson 11: Valuation, written by fellow contributor Dave Van Knapp, comes in.

It’s a fantastic resource designed to educate newcomers and experts alike on what valuation is, why it matters, and how to use simple tools to go about valuing just about any dividend growth stock out there.

With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…

Eversource Energy (ES)

Eversource Energy (ES) is an American utility holding company.

Founded in 1927, Eversource Energy is now a $24 billion (by market cap) diversified utility that employs more than 10,000 people.

Eversource Energy operates regulated electric, gas, and water distribution utilities in the states of Connecticut, Massachusetts, and New Hampshire.

The Electric Distribution segment accounted for 60% of FY 2024 revenue (prior to eliminations); Natural Gas Distribution, 14%; Electric Transmission, 14%; and Water Distribution, 2%. Other accounted for the remainder.

The company serves ~4.4 million customers, with the overwhelming majority of them (~3.3 million) being electric utility customers.

The idea of investing in a utility like Eversource is so sensible and straightforward.

It comes down to the fact that Eversource is providing captive customers with something (electricity) they cannot live without in a modern-day society.

People think they can’t live without things like, say, their smartphone.

But I personally lived without a smartphone until I was already well into adulthood (I’m aging myself here).

Trust me, it’s very possible to live without your phone.

Electricity in today’s society, on the other hand, is practically impossible to go without.

You could technically survive without electricity, sure, but you can’t live much of a life.

Even short power outages can wreak havoc on lives.

Power is something that makes today’s world possible.

I mean, good luck charging that precious smartphone without electricity.

Part of the investing rationale here is the fact that there’s sheer necessity at play.

Making matters even more appealing, power utilities across the US run local monopolies.

There is almost always just one provider for any single geographic area.

Merging a basic need with a localized monopoly creates a beholden customer base which will automatically seek these services and reliably pay for them (out of fear of losing services).

The revenue is nearly guaranteed.

On the flip side, since it would be easy for a utility to take advantage of this position of power, utilities are heavily regulated by government bodies in order to provide protection to consumers.

The regulatory framework creates both a floor underneath the business model and a ceiling on the possible profits.

The “floor” supports recurring revenue: In exchange for investing in infrastructure and providing necessary services, utilities are allowed reasonable rates of return on investments.

To that point, Eversource Energy’s current plan calls for investing slightly more than $23 billion between 2024 and 2028 in order to upgrade core infrastructure, ensure dependable service to customers, and drive returns on these investments under its regulatory framework.

In particular, because Eversource Energy’s region is expecting electric demand to more than double by 2050, management is aggressively pursuing an electrification strategy.

On the other hand, the “ceiling” on profit limits just how much money a utility can make: Utilities are often capped by regulators on those same aforementioned rates of return.

Rates charged to customers can only go so high, and this restriction tends to limit the returns that shareholders can expect to receive from publicly-traded utilities.

This means the appeal of a utility depends on one’s personality and objectives: How much does one value such visible and recurring revenue, and is one okay with giving up huge upside potential in exchange for that level of stickiness and visibility?

All of this boils down to beautiful simplicity: Providing necessary services via local monopolies, all with government-backed profit supported by huge investments, along with an electrification strategy should lead to higher revenue, profit, and dividends over the decades to come.

Dividend Growth, Growth Rate, Payout Ratio and Yield

Indeed, Eversource Energy has increased its dividend for 27 consecutive years.

Yes, this is an esteemed Dividend Aristocrat.

This level of consistency illustrates the power of the business model.

Its 10-year dividend growth rate is 6.2% – a mark that easily beats inflation.

That’s very solid for any utility, but what makes it especially strong in this case is that it comes on top of the stock’s market-smashing yield of 4.6%.

Putting this yield in perspective, it’s 110 basis points higher than its own five-year average.

That’s the kind of spread that indicates a possible opportunity afoot.

However, the payout ratio, at 82.7%, is currently quite elevated, so that’s something to be aware of.

The combination of yield and growth here is something that can appeal to almost all dividend growth investors, providing a healthy dose of both.

Revenue and Earnings Growth

As healthy as it may be, though, this dividend profile is largely drawn up using past data.

However, investors must always be thinking about possible future outcomes, as today’s capital is risked for tomorrow’s rewards.

Thus, I’ll now build out a forward-looking growth trajectory for the business, which will come in handy when attempting to estimate fair value.

I’ll first show you what the business has done over the last decade in terms of its top-line and bottom-line growth.

I’ll then reveal a professional prognostication for near-term profit growth.

Blending the proven past with a future forecast in this way should give us what we need to draw conclusions on where the business may be going from here.

Eversource Energy grew its revenue from $8 billion in FY 2015 to $11.9 billion in FY 2024.

That’s a compound annual growth rate of 4.5%.

Very respectable for a power utility – a business model that typically features modest, mid-single-digit top-line growth.

Meanwhile, earnings per share increased from $2.76 to $4.57 (adjusted) over this period, which is a CAGR of 5.8%.

Again, this is right about what one might expect to see from a power utility.

It’s not amazing.

But it’s certainly not bad at all.

It’s the kind of business that consistently moves the chains down the field one yard at a time, grinding out gains over the long haul.

Think of it as the turtle in the race against the hare.

With that said, I’ll now point out that I used adjusted EPS for FY 2024.

This is due to the fact that Eversource Energy’s GAAP EPS has recently been affected by impairments.

Management took capital from its core regulated utility business and made things more difficult than they needed to be by pursuing complex offshore wind energy projects – projects which were outside of its core competency.

These turned out to be poor investments.

The company totally exited its offshore wind business in Q3 2024, capping off a series of impairments, making Eversource Energy now a pure-play regulated utility (and the largest of its kind on the New England region).

This milestone caps off a journey back to normalcy.

The offshore wind investments created a sentiment overhang on the business and stock.

Reduced market enthusiasm (which has been arguably warranted) has led to the stock being mercilessly punished over the last several years (e.g., the stock is still down 30% from 2022 highs).

With the offshore wind exposure story out of the way, Eversource Energy’s management team can focus solely on its capital investment plan to fuel growth.

As such, the overhang should start to slowly disappear over time, driven by a one-two combination of removed distractions and low expectations.

While those who have held the stock through the turmoil receive little consolation from this, those who are new to the name have an interesting setup to play with.

Looking forward, CFRA is projecting that Eversource Energy will compound its EPS at an annual rate of 6% over the next three years.

Seeing as how Eversource Energy did almost precisely this over the last decade, we’re not exactly looking at a stretch here.

This is also exactly in the middle of Eversource Energy’s own long-term EPS CAGR target of 5% to 7%.

A lot of this is driven by rate updates, as CFRA notes: “We anticipate customer rate updates will support roughly 6% revenue growth in 2025, followed by near 5% growth in 2026.”

CFRA then adds: “Overall, [Eversource Energy] maintains a $24.2B capex plan from 2025 to 2029. The company guides for approximately 8% rate base CAGR from 2023 to 2029, highly competitive with peers. [Eversource Energy] maintained its 2025 EPS guidance ($4.76 midpoint) and long-term 5%- 7% CAGR target.”

Again, that target supports an up-the-middle 6% expectation over the near term, which seems reasonable based on the spending plan and rate updates.

One wrinkle here, though, is the failed attempt to sell its water distribution subsidiary Aquarion for nearly $2.5 billion, which was blocked by Connecticut regulators.

Eversource Energy had planned to unload Aquarion in order to clean up the balance sheet, support the large CapEx plan, and transform into a cleaner story as a pure-play electric utility (after shedding offshore wind and water businesses).

Putting the kibosh on the Aquarion sale does likely result in a bit of pressure on the spending plan, which will feed through into EPS growth (due to the relationship between investment and rates/earnings for utilities).

Still, if we take a cautious approach and assume something closer to the low end of management guidance, we’d still be looking at mid-single-digit growth on top of that shiny 4.5%+ yield.

Plus, there’s the possible upside from multiple expansion on the back of sentiment improvement (resulting from the self-help story slowly playing out, notwithstanding the Aquarion setback).

We could be easily talking about a low-double-digit annualized return situation here – on a power utility with very resilient recurring revenue.

That’s certainly not a bad setup at all when compared to the range of opportunities across the utility space.

Financial Position

Moving over to the balance sheet, Eversource Energy has a mediocre balance sheet.

The long-term debt/equity ratio is 1.7, while the interest coverage ratio is barely over 2.

Even by the low standards a power utility is held to, these numbers are somewhat poor.

Recent decisions around capital allocation have been unsatisfactory, partly evidenced by the fact that long-term debt load has more than tripled over the last decade.

Moreover, the “white knight” help for the balance sheet that was the supposed to come in the form of the Aquarion sale isn’t materializing.

All that said, power utilities naturally have balance sheets which are heavily leveraged: Growth plans are usually funded through equity and debt issuances (with ROI support from regulators).

While some large banks are “too big to fail”, one might think of power utilities are “too critical to fail”.

Investment-grade credit ratings for the parent company should also add some confidence to the story: BBB+, S&P; Baa2, Moody’s; BBB, Fitch.

Profitability is fairly ordinary for a power utility, although unwise capital allocation decisions over the last several years has temporarily depressed various metrics.

Return on equity has averaged 5.9% over the last five years, while net margin has averaged 8.1%.

Under more normal circumstances, the company typically posts ~9% ROE.

While that’s not excellent, it’s a competitive number for a power utility dealing with difficult regulators.

In my view, Eversource Energy is a good power utility business that is undergoing improvement as it attempts to restore itself to its former glory.

And with economies of scale, established infrastructure, and monopolistic control over its service territories, the company does benefit from durable competitive advantages.

Of course, there are risks to consider.

Competition, regulation, and litigation are omnipresent risks in every industry.

While competition is effectively eliminated through local service territory monopolies, regulation is magnified for this business model and purposely limits growth through a government-enforced profit framework.

Connecticut, which geographically represents ~25% of the company’s earnings, is a notoriously challenging regulatory district.

The offshore wind mistake invites questions around execution and management’s ability to make sound capital allocation choices.

The company’s balance sheet is in somewhat poor condition, limiting how fast and big the company can go on growth/infrastructure projects.

Its territories tend to lean politically progressive, pressuring a shift away from natural gas (impacting ~15% of revenue); the company’s pivot into electrification is anticipatory, but the cold climates in which the company operates will likely require the usage of natural gas for heating for the indefinite future.

Natural disasters, especially fires, are always a possible hazard for utilities.

Outside of the offshore wind distraction, the risks I see here are pretty common for a power utility.

However, the valuation is anything but common, with the stock still being punished for past mistakes via its 30% decline from recent highs…

Valuation

 

The P/E ratio of 18.4, which is well below its own five-year average of 22.2, highlights the relative cheapness at play right now.

The cash flow multiple is only 6.2, further reinforcing the undemanding nature of the valuation.

And the yield, as noted earlier, is significantly higher than its own recent historical average.

So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?

I valued shares using a dividend discount model analysis.

I factored in a 10% discount rate and a long-term dividend growth rate of 5.5%.

This 5.5% mark almost precisely lines up with the 10-year EPS CAGR, and it’s also not far off from the proven dividend growth over the last decade.

My number is grounded in reality.

Furthermore, with it being on the low side of management’s forward guidance, I think it’s prudent and errs on the side of caution.

The DDM analysis gives me a fair value of $70.57.

The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.

The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.

It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.

I find it to be a fairly accurate way to value dividend growth stocks.

Based on where I’m standing, the stock looks inexpensive.

But we’ll now compare that valuation with where two professional stock analysis firms have come out at.

This adds balance, depth, and perspective to our conclusion.

Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.

1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.

Morningstar rates ES as a 4-star stock, with a fair value estimate of $73.00.

CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.

They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.

CFRA rates ES as a 4-star “BUY”, with a 12-month target price of $75.00.

My number is light, but we’ve got a decent consensus here. Averaging the three numbers out gives us a final valuation of $72.86, which would indicate the stock is possibly 8% undervalued.

Bottom line: Eversource Energy (ES) is using localized monopolies to provide captive customers with something they practically cannot live without. It’s an almost can’t-lose business model. The self-help story is playing out, meaning improving sentiment offers a lot to look forward to. With a market-smashing yield, an elevated payout ratio, mid-single-digit dividend growth, more than 25 consecutive years of dividend increases, and the potential that shares are 8% undervalued, this high-yield Dividend Aristocrat is a strong investment idea for long-term dividend growth investors.

-Jason Fieber

Note from D&I: How safe is ES‘s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 60. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, ES‘s dividend appears Borderline Safe with a moderate risk of being cut. Learn more about Dividend Safety Scores here.

P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.

Source: Dividends & Income

Disclosure: I’m long ES.