Sempra, A Dividend Contender With A Negative Free Cash Flow

Aug.19.14 | About: Sempra Energy (SRE)

Summary

The results of Q2 are positive, including confirmed guidance.

Sempra is a dividend contender with a growing track record during the past 10 years.

During the last 3 years, the free cash flow has been negative.

Sempra Energy (NYSE:SRE) is an American company operating in the energy distribution and production field, and it's part of the S&P500. Its activities can be divided into 3 parts.

The first, California Utilities, consists of San Diego Gas & Electric (SDG & E) and Southern California Gas Company (SoCalGas). These two entities have about 24 million customers in the United States.

The second part, Sempra International, produces and distributes energy in Mexico, via Sempra Mexico, and other countries (Peru and Chile) with Sempra South American Utilities.

Finally, the third part, Sempra US Gas & Power, is divided in two, Sempra Renewables and Sempra Natural Gas. This part exploits renewable energy sources (solar, wind) and LNG.

Q2 Results

Q2 results were solid, thus allowing the company to reaffirm its guidance of an EPS of $4.25-$4.55, hoping to be in the upper part of this estimate. Only for Q2, the EPS is $1.08, which represents $2.07 for the first six months of the year.

The other very important point is the authorization received from the FERC to begin the construction of Cameron LNG. Cheniere (NYSEMKT:LNG) was the first company to get this authorization.

This site will allow the export of LNG to gas-consuming countries, including Japan and France, thanks to the contracts already signed with Mitsubishi and GDF Suez. This project provides great hope for growth, as Sempra Natural Gas' revenues were $13 million for the first half of 2014, a figure that could rise significantly in the medium term due to these LNG exports.

An Established Dividend Contender

Today, Sempra is on the Dividends Contenders list -- those companies that have proven their ability to pay dividends, and especially to increase them, for at least 10 years.

Here is the company's dividend history since 2004 (source: Sempra Investor Relations):

Year

Dividend per year (NYSEARCA:USD)

2004

1

2005

1.12

2006

1.19

2007

1.23

2008

1.33

2009

1.52

2010

1.56

2011

1.83

2012

2.28

2013

2.49

Click to enlarge

With the current dividend of $0.66 per quarter, the distribution in 2014 will be $2.64, which gives an average annual growth of 14% since 2010.

(Source: annual shareholders meeting)

Click to enlarge

The most important question is whether this dividend is sustainable, and whether Sempra has the opportunity to continue these annual increases.

Free Cash Flows

Free cash flow is an important factor that shows the cash a company is able to generate after maintenance expenses or the expansion of its assets. This cash can be used to pay dividends, repurchase shares, etc.

It is determined by several existing methods. I use the following formula:

Free cash flow = (cash from operating activities) - (capital expenditures and & investments).

In its annual report of December 2013, Sempra reported the following data:

Capex (page 2):

Year

2011

2012

2013

Capex & Investments (M$)

3785

3401

2594

Click to enlarge


Cash flows from operating activities (page 36):

Year

2011

2012

2013

Cash flows from operating activities (M$)

1867

2018

1784

Click to enlarge


This gives the following results:

Year

2011

2012

2013

Capex & Investments (M$)

3785

3401

2594

Cash Flows from operating activities (M$)

1867

2018

1784

Free cash Flow (M$)

(1918)

(1383)

(810)

Click to enlarge

For 3 years, the company has never had a positive free cash flow. This can be explained by heavy investments needed for development, especially the Cameron LNG site, which requires an estimated cost of $9 billion to $10 billion.

But this data is of high importance when estimating the sustainability of the dividend. In fact, if the situation were to continue for several years, it is likely that the dividend increases could slow, maybe even stop. Remember, the opening of Cameron LNG is expected by 2018, the earliest.

Conclusion

Since the early 2000s, Sempra Energy has proven itself to be able to increase its dividend on an annual basis, and the company is now on the list of Dividend Contenders. However, one ought to be vigilant in the future, and closely monitor the free cash flow.

Indeed, if the FCF is negative year after year and the company uses debt to pay shareholders, it might be difficult to get to 2018 and the commencement of LNG operations on the Cameron site. This will most likely involve capex reductions, and it might jeopardize the company's Dividend Contender status. Conversely, if Sempra Energy continues to increase the dividend every year until then without using too much debt, it will open the horizons for generating positive FCF. Thus, the company will be able to facilitate further dividend growth.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.