Sempra Energy - Dividend Fact Sheet

| About: Sempra Energy (SRE)

Sempra Energy (NYSE:SRE) is a U.S.-based electric and gas utility which serves clients mainly in California. Sempra also own energy assets in Alabama and Mississippi, and in Mexico, Peru and Chile.

SRE is part of the S&P 500 index. SRE is an American corporation and therefore pays its quarterly dividends in U.S. dollars. All the following figures are thus in U.S. dollars. Notably, foreign investors will likely be subjected to withholding tax.

Dividend Calendar

SRE pays a quarterly dividend. The dividends are generally declared in December, February, June and September, and are generally paid in January, April, July, and October.

SRE generally increases its quarterly dividend once a year, in February. In that sense, the last increase in February 2014 was of 4.8% (from $0.63 per quarter to $0.66 per quarter).

Dividend History

With the most recent increase, SRE has increased its quarterly dividend for 11 consecutive years, making SRE a dividend contender (between 10 and 24 years of consecutive dividend increases).

The evolution of the annualized dividend and of its growth over the last ten years is presented in the graph below.

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Clearly, the rate at which SRE increases its dividend varies from year to year. Though for most of the last decade, the annual dividend growth rate has remained within the 5-15% range, there is no obvious pattern. A year of high growth can be followed by a year of low growth (e.g. 2009 and 2010) and vice-versa (e.g. 2010 and 2011).

Still, despite the ups and downs, SRE has maintained a year-over-year average dividend growth rate of 10.86% and a compound dividend growth rate of 10.67%. Not bad of a utility. It remains to be seen if SRE will be able to maintain such a high dividend growth rate in the future.

Dividend Analysis

In this section, I verify two important aspects of the dividend:

  1. Is the current dividend safe?
  2. Is the current dividend likely to grow?

Understandably, answering no to either one of these questions should mark the stock under consideration as being unsuitable for dividend investment purpose.

Is the current dividend safe?

To determine the safety of the dividend, I check the historical levels, the current level and the evolution of the payout ratio with respect to the earnings and, when relevant, with respect to the free cash flow.

First, the evolution of the earnings, dividends, and payout ratios.

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Between 2004 and 2009, SRE has maintained a payout ratio under 40%, which is very safe for a utility.

Then, starting in 2010, the payout ratio has become more erratic, even rising above 60% in 2012 and 2013. However, after the peak of 2013, the payout ratio seems to be a downward trend, which bodes well for the future. The upward trend of the earnings since 2010 is another plus.

Though I would definitely prefer the previous payout ratio under 40%, even at 60%, I consider the payout ration to be reasonable safe for a utility. So, with earnings growing again and with a reasonable payout ratio, SRE dividend appears to be safe.

Overall, I think the current dividend is safe.

Is the current dividend likely to grow?

As we have seen above, SRE has been increasing its dividend every year for the last 11 years. Clearly, SRE has shown its willingness to pay growing dividends. So, I expect SRE to continue to increase its dividend in the foreseeable future.

Again, what remains to be seen is at what rate. Though both the average year-over-year and compound dividend growth rates over the last 10 years are around 10%, I don't expect SRE to maintain such rates in the future. Though it has started to decrease, the payout ratio is still around 60%. So future dividend growth is probably going to more or less follow the growth in earnings in order for the payout ratio to stabilize and hopefully decrease.

Overall, I think the current dividend is likely to grow in the foreseeable future.

Stock Valuation

Estimated Fair Values

To calculate a range of fair values, I calculate how much one share will return in cumulative dividends over the next 20 years, according to different scenarios, and adjusted for inflation.

For SRE, I've used the following inputs:

  • Share price: $99.00
  • Dividend rate: $2.64
  • Dividend growth rate:
    • Optimistic scenario: 10.0%
    • Realistic scenario: 8.0%
    • Pessimistic scenario: 6.0%
  • Inflation rate: 3.5%

The optimistic DGR generally corresponds to the 10-year average, while the realistic and pessimistic DGRs respectively correspond to 80% and 60% of the optimistic DGR.

According to the above values, the range of estimated fair values for SRE varies from $66.87 (pessimistic) to $100.09 (optimistic) with a realistic value of $81.51. With a current share price around $99.00, SRE appears almost overvalued.

I've also calculated that the DGR would need to be 9.89% over the next 20 years to justify the current price of $99.00. This DGR is almost equal to the average year-over-year and compound DGRs of the last 10 years.

As indicated, I don't expect SRE will maintain such rates in the future (unless the earnings grow at such rates). In any event, at a current price around $99.00, SRE doesn't provide any margin of safety should the future DGR be lower.

At $99.00, I think SRE is overvalued as a dividend investment.

Estimated Cash Return

With the estimated cash return, I calculate how much cumulative dividends a fixed investment in the stock under consideration will return over a period of years.

Estimated cash return values allow to compare dividend stocks with different yields and different growth rates.

For SRE, I've used the following inputs:

  • Initial investment: $1000
  • Current yield: 2.67%
  • Dividend growth rate:
    • Optimistic scenario: 10.0%
    • Realistic scenario: 8.0%
    • Pessimistic scenario: 6.0%

Notably, the DGRs are the same as the DGRs used for valuation.

I also compare the various estimated cash return values with the estimated cash return of a benchmark dividend stock having a yield of 3% and a dividend growth rate of 8% (e.g. Procter & Gamble (NYSE:PG) or Johnson & Johnson (NYSE:JNJ)).

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What is interesting to note in the ECR graph is that the only scenario that beats the benchmark stock with respect to cash return is optimistic one. However, the optimistic scenario implies a DGR of 10% over the next 30 years, which is very unlikely.

So, if we assume the lower DGRs of the realistic and pessimistic scenarios, that is 8% and 6% respectively, SRE would return less money than the benchmark stock. Again, this seems to confirm that SRE is probably overvalued at the current price. In that sense, given SRE current yield and dividend growth prospect, an investment in the benchmark stock would make more sense.

At the current price and yield, I think SRE would make a underperforming dividend investment.

Conclusion

SRE would be an interesting stock, if only its stock price was lower and its yield was higher. However, at the current price (~$99.00) and yield (~2.70%), and given its dividend growth prospect, SRE appears overvalued and without any margin of safety.

That being said, SRE should be on your watchlist, but clearly, wait for a lower price.

Final recommendation: I don't think SRE is a buy.

Full Disclosure

I don't currently own shares of SRE. I don't intend to initiate a position in SRE within the next 72 hours.