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).
Natural Gas Distribution - New Jersey Natural Gas Company, whose income and assets comprise about two-thirds of the company, is a regulated retail natural gas service that participates in the off-system sales and capacity release markets.
Clean Energy Ventures - NJR Clean Energy Ventures is the unregulated segment that includes commercial and residential solar projects.
Energy Services - NJR Energy Services Company maintains and transacts physical assets consisting of natural gas storage and transportation contracts in the U.S. and Canada.
Midstream - NJR Midstream Holdings Corporation invests in energy-related ventures through its subsidiaries.
Home Services - NJR Home Services Company provides heating, ventilation and cooling service, and sales and installation of appliances to approximately 108,000 service contract customers.
| 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.
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.
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.
