NorthWestern Corporation: Sturdy As A Montana Mountain For Dividend Growth Investors

Oct. 22, 2021 7:20 AM ETNorthWestern Corporation (NWE)33 Comments14 Likes

Summary

  • NWE is an electric and gas utility serving territories in Montana, South Dakota, Nebraska, and Yellowstone National Park.
  • The utility company may not offer breakneck rates of growth, but its starting dividend yield of ~4.4% makes up for it.
  • With 15 consecutive years of dividend growth, a solid balance sheet, above-average population growth, and good relationships with regulators, NWE is well-positioned for more steady growth ahead.
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epic Montana mountain winter landscape at Lone Peak Big Sky

Gypsy Picture Show/iStock via Getty Images

Thesis: Solid Pick For DGIers

NorthWestern Corporation (NASDAQ:NWE) is a utility company serving 743,000 customers across Montana, South Dakota, Nebraska, and Yellowstone National Park. It is a steady-eddy dividend growth stock as well as a well-run company.

The balance sheet is strong (senior unsecured credit ratings of A-, Baa2, and BBB), customer bills are below the national average, population growth is above the national average in its service territories, and customer satisfaction scores recently hit record levels. On the back of these solid fundamentals, NWE has raised its dividend annually for 15 years in a row. Going forward, the utility expects dividend growth to follow EPS growth in a range of 3-6% per year.

At a dividend yield of 4.36% and a dividend growth rate going forward of around 4.5% per year, NWE looks like a solid pick for conservative DGI - or "growth of income" - investors right now.

Head Start On Clean Energy

NWE has already made considerable headway toward decarbonizing its power generation infrastructure. The utility has invested around $1 billion in clean electricity projects in the last five years. Nearly 8 in 10 dollars of NWE's gross margin is derived from electricity.

Source: Sidoti Small-Cap Investor Conference Presentation

Already, the full portfolio produces 65% of its electricity from carbon-free sources. In Montana, 70% of power production originates from zero-carbon sources, and 47% of electricity generated in South Dakota comes from wind turbines.

Source: Sidoti Small-Cap Investor Conference Presentation

Notice that most of NWE's owned power generation assets are either hydroelectric dams or coal plants, the latter of which will probably be mostly switched to natural gas and renewables in the future. NWE derives an above-average level (46%) of its electricity capacity from the market, which means it must pay market rates for this power. That exposes the utility to risk in the rare case (such as the February 2021 Winter Storm event) that a simultaneous region-wide spike in power demand causes prices to soar.

Here's what NWE's real-time power generation looked like, separated out by source, over the last week:

Source: NorthWestern Corporation

In order to firm up its generation capacity and meet the growing demand for electricity and gas from its growing populations...

Source: Sidoti Small-Cap Investor Conference Presentation

...NWE is investing hundreds of millions of dollars into new power generation capacity to come online in the coming years.

The utility also seeks out third-party power suppliers to fill the gaps. For instance, it recently signed a 5-year power purchase agreement with Powerex for 100 MW of electricity originating from hydroelectric dams, and it also signed a 20-year contract with esVolta Energy Storage for use of a 5-hour duration, 50 MW battery storage facility in Montana.

NWE's long-term strategy implicitly acknowledges a reality I've observed in the last few years that, regardless what politicians do, the power production sector will become increasingly reliant on natural gas as the decarbonization push makes headway. Gas is needed for both baseload generation and flexible peaker generation to steady electricity output and be able to match volatile demand patterns.

You can't make the sun shine brighter or the wind blow harder when customers are all turning on their heaters or air conditioners at the same time.

In that spirit, NWE has been investing in gas plants, some for baseload generation and others for flexible output (peaker plants), across its service territories, even as it also ups its renewables game. The latest example is the Laurel Generating Station, a natural gas-fired, 175 MW, 24/7 flexible supply plant set to be completed by 2023.

Source: NorthWestern Corporation

To quote an October 21st company press release:

Additional 24/7 on-demand energy sources are required in order to add more renewable, variable resources - wind and solar - to keep the grid stable as we transition to an even cleaner energy future.

Investors should look for more of these kinds of investments from NWE in the future in order to shore up its capacity needs with reliable complements to its wind and solar power assets and contracts.

On that note, it was good to see that in Q2, NWE completed "a record amount of maintenance capital work," according to CEO Bob Rowe in the second quarter earnings release. Much of this maintenance capex was likely meant to ameliorate the risk of wildfires, which have burned around 940,000 acres of forestland in Montana this year alone.

Strong First Half of 2021

NWE has enjoyed a robust rebound from the pandemic in the first half of this year.

  • Total revenue in the first half of 2021 up 15.6% YoY
  • Gross margin (revenue minus cost of goods sold) in 1H 2021 up 7.6% YoY
  • Operating income in 1H 2021 up 16.6% YoY
  • Diluted EPS of $1.96 for 1H 2021 up 37.1% YoY

This huge growth over 2020 numbers is an outlier, of course. From 2013 to 2020, non-GAAP EPS growth averaged 4.3% per year.

Source: NWE Q2 Earnings Presentation

For the decade ending in 2020, however, non-GAAP earnings growth averaged a slightly lower 3.7% per year. Dividends during that decade, on the other hand, grew at a very respectable 5.8% average annual rate.

Management has issued a diluted EPS guidance range of $3.43 to $3.58 for 2021, representing mid-single-digit growth from 2019's number.

The long-term target EPS growth rate is 3-6%, which management aims to accomplish while maintaining a 60-70% dividend payout ratio.

Dividends of $1.24 per share in 1H 2021 amount to a payout ratio of 63.3%. Assuming a full-year dividend of $2.48 and EPS of $3.50, NWE's 2021 payout ratio for the whole year should end up around 71%.

Bottom Line

Other than the two main risks of wildfires in Montana and over-reliance on market rates for electricity needs, NWE strikes me as a mostly conservative dividend growth investment. Importantly, the utility has maintained strong, constructive relationships with its regulators that have proven useful over the course of the pandemic.

Right now seems like one of the best times in the last decade to buy the stock. The dividend yield is near its 10-year highs (outside of one spike in late 2020).

Chart
Data by YCharts

And the price-to-earnings ratio is likewise near the low end of its range since 2014:

Chart
Data by YCharts

In short, NWE looks like a solid value pick for conservative dividend growth investors right now.

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This article was written by

Austin Rogers profile picture
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Become a “Passive Landlord” with our 8% Yielding Real Estate Portfolio.

My adult life can be broken out into three distinct phases. In my early 20s, I earned a bachelor's degree in Cinema & Media Arts (emphasis in screenwriting), but I hated working in Hollywood. Too much schmoozing and far too much traffic. So, after leaving California, I earned a Master of Fine Arts in Creative Writing from Western State Colorado University. I loved writing fiction, but it didn't pay the bills.

In my mid-20s, I became a real estate agent and gained some very valuable experience in residential and commercial real estate. But my passion for writing never went away.

Now, in my early 30s, I write for Jussi Askola's excellent marketplace service, High Yield Landlord, as well as its sister service, High Yield Investor. I also perform freelance research for a family office that owns and manages over 40 net lease commercial properties in Texas and Arkansas. Writing about finance and investing scratches that creative itch while paying the bills - the best of both worlds.

I'm a Millennial with a long-term horizon and am fascinated with the magic of compound interest and dividend growth investing. I also have an interest in macroeconomic trends, though I am but an amateur in that field.

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Disclosure: I/we have a beneficial long position in the shares of NWE either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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