Chesapeake Utilities A Standout Utility Dividend Stock

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 |  About: Chesapeake Utilities Corporation (CPK), Includes: SPY, XLU
by: Richard Shaw

Looking for low volatility conservative income in a stock that is performing well, we did this screen today seeking stocks in the better half of the market in terms of standard deviation, Beta, total return, dividend yield, dividend growth rates and earnings growth rate. To avoid debatable issues about analyst opinions and forecasts, this filter was based entirely on historical data.

Filter Criteria (data from Fidelity):

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Filter Results:

Of all 7,225 stocks in the database we used, only 2 stocks passed this filter - both utilities.

After the quantitative filter, we consulted analyst opinions and determined that one stock was seen as bearish with about equal upside and downside potential, and the other was strongly bullish with each of the low, average and high 12-month price targets above the current market price.

We looked at the businesses ourselves and believe that the potential for the one analysts like has a stronger intermediate-term potential, based on the markets served and some other factors. The preferred company of the two also has a dividend history that is much more suitable for those investors seeking consistent year-to-year dividend payments

That stock is Chesapeake Utilities (NYSE:CPK).

Summary Business Description for CPK (data from Yahoo Finance):

Chesapeake Utilities Corporation, a diversified utility company, engages in the regulated and unregulated energy, and information services businesses. The company operates in three segments: Regulated Energy, Unregulated Energy, and Other.

The Regulated Energy segment generates about 2/3 of company profits and provides natural gas distribution services to approximately 49,639 residential and 5,320 commercial and industrial customers in Central and Southern Delaware and on Maryland's eastern shore, as well as 62,386 residential customers and 6,670 commercial and industrial customers in 21 counties in Florida; electric distribution services to 31,066 residential, commercial, and industrial customers in Florida; and natural gas transmission services to other utilities and industrial customers in Southern Pennsylvania, Delaware, and on the eastern shore of Maryland, as well as offers swing transportation and contract storage services. This segment operates a 428-mile interstate natural gas transmission pipeline.

The Unregulated Energy segment generates about 1/3 of company profits and offers natural gas supply and supply management services to approximately 3,189 customers in Florida and 28 customers on the Delmarva Peninsula; distributes propane to 34,837 customers throughout Delaware, the eastern shore of Maryland and Virginia, and southeastern Pennsylvania, as well as 14,475 customers in various counties in Florida; and markets propane to independent oil and petrochemical companies, wholesale resellers, and retail propane companies in the Southeastern United States.

The Other segment offers information technology services and solutions for enterprise and e-business applications.

Chesapeake Utilities Corporation was founded in 1859 and is headquartered in Dover, Delaware.

10-Yr Price and Dividend History (from YCharts.com):

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In their most recent financial presentation, they said this about their dividend (from company website):

"Chesapeake has paid a consecutive dividend for 52 years. Chesapeake has paid an increasing dividend for the last 10 years. In 2013, the annualized dividend was increased by $0.08 per share, or approximately 5.5%."

They supported that statement with this chart showing the dividend and what they called the sustainable growth rate:

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The current yield of 3% compares to multi-year yield data as follows (data from AAII):

  • 4.52% 7-year average high
  • 3.22% 7-year average low
  • 3.4% 3-year average
  • 3.8% 5-year average
  • 3.8% 7-year average

Like most dividend stocks, this stock is at long-term low yield levels as a result of investors seeking income for two key reasons:

(1) bonds don't pay much anymore, and

(2) more and more investors are in retirement years and need both income and income growth.

As with most dividend stocks there is significant interest rate risk in the price of the stock, but unlike bonds these stocks are potentially capable of increasing earnings, and therefore dividends, as the economy improves.

Presumably interest rates would rise as the economy gets better and stock revenues (utility energy use in specific for this stock) would rise. That would mitigate part of the interest rate risk. There is likely to be a lag between the rise in rates and the increased profits and dividends from stocks, so short-term price declines would be expected. How strong the interest rate impact is versus the expected rise in business fortunes is not fully knowable, but dividend stocks should do better than bonds in any event.

Correlation With Stock and Bond Funds (data from Vanguard):

These 1-year, 3-year and 5-year correlations show that recently CPK (and by induction utilities) have correlated to some degree with price movements in bonds. There was a negative correlation for 3 years and 5 years. That recent correlation is problematic until rates come out from under Fed suppression and "normalize" (whatever that means?).

The correlation matrices display CPK, VFINX (the S&P 500), XLU (the S&P 500 utility sector), VBMFX (the US aggregate bond market) and VFICX (intermediate-term investment grade corporate bonds).

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10-Yr Revenue, Cash Flow From Operations, and Earnings:

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In their most recent financial presentation, they broke down their profit segments with this pie chart:

Their latest 10-K provided this long-term set of selected operating income data:

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This chart compares their cash flow to free-cash-flow for the past several years. Negative free-cash flow is to be expected in a capital intensive business such as this as they replace and expand facilities (from AAII).

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10-Yr Assets/Liabilities, Current Ratio, Quick Ratio and EBIT/Interest Expense:

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10-Yr Valuation - EV/EBITDA, P/E ttm, and P/Book:

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Industry Comparison (from S&P Capital IQ):

Price vs S&P 500 (NYSEARCA:SPY) (from Schwab):

While the stock closed at $52.49, down from its $55.86 peak, it has not reached the 10% correction level of about $50, and is well above its 200-day average of $48.65, and it is about at the mid-point of its 3-month high/low price range.

It has substantially outperformed the S&P 500 since 2009.

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Over the past 3 months its price behavior has been similar to that of the S&P 500, as represented by SPY (the light gray line)

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ThompsonReuters StarMine Analyst Ratings (from Fidelity):

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Analyst 12-Month Price Targets (from 4-Traders.com):

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BarChart Short-Term Technical Opinion (from BarChart.com):

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BarChart Technical Opinion vs. Other Utilities (from BarChart.com):

CPK and XLU are bordered in black.

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10-Year Quarter-by-Quarter Performance vs. S&P 500 (from Principia):

This shows the performance of CPK less the performance of the S&P 500 for the past 40 quarters.

10-Year Cumulative Performance vs. S&P 500 (from Principia):

We do not currently own CPK, but expect to do so in the future.

Disclosure: QVM has positions in SPY as of the creation date of this article (June 10, 2013). We certify that except as cited herein, this is our work product. We received no compensation or other inducement from any party to produce this article, but are compensated retroactively by Seeking Alpha based on readership of this specific article.

General Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.