Regulated Electricity Operations Provide Consistent Growth
The utility sector is filled with large, blue-chip stocks with which income investors are very familiar, but there are also under-the-radar utility stocks every bit as rewarding as their bigger industry peers. One example is IdaCorp Inc. (IDA ), a small utility with a $3.8 billion market capitalization. IdaCorp traces its roots all the way back to 1916 at its primary subsidiary, Idaho Power. IdaCorp is a regulated electric utility that provides service to customers in southern Idaho and eastern Oregon.
IdaCorp stock has performed very well over the past one year. Based on its Sep. 15 closing price of $76.62 per share, the stock has returned 30% over the past 12 months, not including its dividend payments in that time. This is an excellent level of performance for a normally slow-and-steady utility stock, and it speaks to the high level of demand for dividend stocks right now.
The stock currently sits just 2% off its 52-week high, meaning it has strong relative strength. Investor appetite for yield in this low-rate environment means investors are willing to pay up for high-quality dividend stocks. This combination of capital gains and dividend income make IdaCorp an attractive dividend stock in the utility sector.
Focus on Regulated Operations
IdaCorp has set itself apart from other utilities in two ways. First, it has focused on its regulated operations. While some utilities prefer a split between regulated and unregulated electricity generation, the advantage of pursuing a regulated model is its allowance for periodic rate increases, usually on an annual basis. Getting rate increases approved each year virtually guarantees a modest level of revenue growth each year.
Second, IdaCorp’s strategic imperative when it comes to generation is diversification, particularly when it comes to renewable energy. IdaCorp sources more of its generation from renewable sources than most other U.S. utilities. Last year, IdaCorp derived 16% of its resource portfolio from renewable sources, such as geothermal, wind and biomass. In addition, another 36% of its energy mix comes from hydroelectric power, which is much cleaner than coal. Coal constituted 28% of IdaCorp’s portfolio last year, while 13% came from natural gas. And – thanks to the relative cheapness of natural gas and its less harmful environmental effects – the shift from coal to natural gas is accelerating.
Going forward, IdaCorp will also begin developing its solar power generation. As of Feb. 2016, it had 320 megawatts of solar capacity and is scheduled to begin production this year. By the end of 2016, more than 60% of IdaCorp’s generation could come from renewable energy sources.
These strategies have proven to be cost-effective and accretive to the company’s earnings per share. This has provided the company with steady revenue and earnings growth over the past five years.
Steady Revenue and Earnings Growth
Expect Mid-Single-Digit Annual Dividend Growth
On Sep. 13, IdaCorp’s Board of Directors declared a quarterly dividend of $0.55 per share, which is a 7.8% increase from the same quarterly dividend payout last year. On an annualized basis, the forward dividend payout rises to $2.20 per share. At the current share price, IdaCorp has a 2.9% dividend yield, which is above the average dividend yield in the S&P 500 by approximately 0.8%, and is a relatively high dividend increase for a utility stock. One of the biggest U.S. utilities, Duke Energy (DUK ), raised its dividend by 3.6% recently. Duke Energy’s increase was covered in an article linked here.
IdaCorp has raised its dividend for the past five consecutive years for a cumulative increase of 83%. This above-average dividend growth is the result of a change in IdaCorp’s dividend policy in recent years. Management decided to increase the optimal payout ratio to 50-60% of annual earnings per share. As a result, management has stated its intention to raise the dividend by at least 5% per year going forward, until it reaches the upper end of the target payout-ratio range.
Analysts expect IdaCorp to increase its earnings per share to $4.09 per share next year, from $3.89 per share projected for 2016. That would represent 3% earnings growth, which is in-line with typical earnings growth in the utility sector. This level of earnings growth would provide enough room for another dividend increase next year and beyond.
The Bottom Line
IdaCorp stock has rallied considerably over the past year, but the stock is still not aggressively overvalued. It trades for valuation multiples on par with the S&P 500, and it offers an above-average dividend yield. IdaCorp may not be a familiar stock for many investors, but it could be a hidden gem for its steady earnings growth and high dividend growth each year.