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Letting Dividends Do Their Work

Future Dividend Champions - New Jersey Resources

by George L Smyth

With 24 consecutive years of dividend increases, New Jersey Resources is on the cusp of becoming a Dividend Champion.

New Jersey Resources provides natural gas and energy services to over half a million customers in parts of New Jersey.  It is organized into five reporting segments (the 2019 Annual Report notes four reporting segments, as Home Services comprises such a small portion of the company that at this point it does not significantly impact the financials).


Net Financial Earnings – Fiscal years ended
30 September from 2019 Annual Report
(Thousands) 2019 2018 2017
Natural Gas Distribution $78,062 $84,048 $86,930
Clean Energy Ventures $77,473 $75,849 $24,873
Energy Services $2,918 $60,378 $18,554
Midstream $14,689 $24,367 $12,854
Home Services and Other $1,911 -$3,829 $6,811

The Natural Gas Distribution segment is sensitive to the price of natural gas, and changes affect cash flows, financing costs, and competitive advantage over energy alternatives.  As a regulated entity it is required to follow guidelines established by the New Jersey Board of Public Utilities.

two year stock price
Chart from Stock Rover

The Clean Energy Ventures has shown a predictable decline in the company’s profitability.  Federal and state tax credits have been the primary drivers of this segment, and as they come to a close there is the possibility of renewal, though this would probably be at a considerably lower rate.  The company’s exit of the wind power business was probably due to this and without the tax benefits, the segment will generate lower returns.

To compensate for this NJR has placed an emphasis on their Midstream investments by acquiring Leaf River Energy Center last October, and anticipates purchasing the Adelphia Gateway pipeline later in the year.  Due to this management anticipates an annual return of around 10%.

The stock underperformed in 2019, dropping about 0.5% compared to the Dow Jones U.S. Gas Utility Index gain of 5.6%.  This was primarily due to the low price of gas and milder summer, which affected the Energy Services segment.

Additionally, there was a dilution in shares due to the initial financing of the Leaf River Energy Center acquisition.  An additional dilution will complete the financing and overage will be used to acquire Adelphia Gateway.

If the price of natural gas rises then that will, of course, help, but that does not appear to be sometime on the near term horizon due to the current glut.  Regardless, shareholder returns, when compared to the industry, have been disappointing.

Shareholder Returns Including Dividends
NJR Industry
1 Year -26.6% -13.6%
3 Year -12.3% 1.9%
5 Year 43.7% 50.8%

The dividend appears secure.  With a payout ratio of around 60%, the 3.5% yield is well covered.  However, whereas the dividend growth rate has traditionally been in the 7% range, this may not be sustainable because growth needs to follow earnings, and the earnings may not be there.  The company’s guidance in that regard over the past four quarters has not been as accurate as one would like.

This is a company that one buys for the dividend, as sales have remained within a pipeline over the past several years.

sales and income chart
Excel spreadsheet

There is no pretense that this is a growth company, but dividend growth will come at the expense of a payout ratio that will eventually no longer be feasible.  This makes it a difficult investment for the long term investor.

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