Securities that have much lower risk than the broad market can still offer attractive dividend yields. These are usually mature, stalwart companies in non-cyclical sectors and thus they can be interesting candidates at we face 40-year high inflation rates and an increasing risk of an upcoming recession.
Find Comfort in Southern Company
Southern Company is a major electric utility that serves approximately 9 million customers in the U.S. via its subsidiaries. It enjoys a wide business moat, as it has spent excessive amounts on its infrastructure and hence it is essentially impossible for other companies to enter its markets.
Thanks to the essential nature of its business, Southern is immune to recessions, as consumers do not reduce their consumption of electricity even during fierce recessions. In the Great Recession, when most companies saw their earnings collapse, the earnings per share of Southern slipped just 1%. In the downturn caused by the pandemic, Southern has grown its earnings thanks to its resilient business model, which involves rate hikes. Overall, Southern has always provided a safe haven to investors during rough economic periods.
On the other hand, Southern has exhibited somewhat poor business performance in recent years. More precisely, it has incurred several cost overruns and delays in its project at Vogtle. This project has faced so many setbacks that it is now 7 years late, with an expected cost that is more than double the initial cost estimate. Consequently, the utility has leveraged its balance sheet significantly over the last six years. Its net debt has nearly doubled while its interest expense consumes 36% of its operating income.
Thanks to its wide business moat, however, and the related reliable cash flows, Southern can easily handle much more debt than most companies. It also recently completed the initial fuel load at Vogtle Unit 3 and hence there is little margin for error in this project from now on. Overall, the worse seems to be behind the company, which now has ample room for future growth.
Southern has grown its earnings per share at a 2.8% annual rate over the last decade and at a 3.8% annual rate over the last five years. Management has provided guidance for annual growth of its earnings per share of 5%-7% in the upcoming years. Given the decent business momentum of Southern and the expected contribution from the Vogtle Plant in the upcoming years, it is reasonable to expect the company to meet its own guidance in the upcoming years.
Moreover, Southern has an exceptional dividend growth record thanks to its rock-solid business model. It has raised its dividend for 21 consecutive years and has not cut its dividend for 75 consecutive years. The stock is currently offering a 4.3% dividend yield. Given its solid payout ratio (for a utility) of 76% and its reliable growth trajectory, investors should rest assured that Southern will continue raising its dividend for many more years.
The only caveat is the modest dividend growth rate of the company, which has grown its dividend at a 3.3% average annual rate over the last decade and over the last five years. Nevertheless, given its immunity to recessions and high inflation, its attractive dividend and its reliable growth trajectory, the stock is an attractive candidate for the portfolios of income-oriented investors in the current investing environment.
Hook Up With Telephone & Data Systems
Telephone & Data Systems is a telecommunications company that provides customers with cellular and landline services, wireless products, cable, broadband and voice services across the U.S. The company started in 1969 as a collection of 10 rural telephone companies and has become a company with a market capitalization of $1.3 billion and nearly $5.5 billion in annual revenues. The Cellular Division generates more than 75% of total operating revenue and thus it is by far the most important division of the company.
Telephone & Data Systems has an 82% stake in U.S. Cellular and essentially relies on this stake to achieve growth. Last year, U.S. Cellular focused on connecting customers in underserved areas, while it also tried to enhance its market share, increase business with government customers in 5G and internet-connected devices and improve its network modernization and 5G programs.
Unfortunately, Telephone & Data Systems has exhibited a volatile performance record. During the last nine years, its earnings per share have grown by 3% per year on average, but they have decreased by 1.4% per year on average over the last five years. A volatile performance record is a red flag , which reveals intense competition and hence it should not be underestimated by investors. Indeed, the three major competitors of Telephone & Data Systems, AT&T (T) , Verizon VZ and T-Mobile (TMUS) , control more than 90% of the total U.S. wireless market and hence they have the power to exert strong pricing pressure on their small competitors.
Telephone & Data Systems has plunged 34% in the first days of this month, thanks to its disappointing earnings report. It grew its revenue by 5% over the prior year’s quarter but it switched from a profit per share of $0.24 to a loss per share of $0.22, which missed the analysts’ estimates by $0.15. As a result, the stock has plunged to a fresh 10-year low.
With that said, the stock seems oversold and fairly attractive at its current level. The disappointing performance resulted primarily from the excessive investments of the company in its growth initiatives, primarily its fiber network. Management has set a goal to reach 1.2 million fiber addresses by 2026. Overall, whenever the investments begin to bear fruit, the market will probably reward the stock.
Telephone & Data Systems has raised its dividend for 48 consecutive years and is currently offering a 10-year high dividend yield of 6.3%. The payout ratio is now standing at 167%, which is unsustainable in the long run. However, given the commitment of the company on growing its dividend and the expected cash flows from its investments, the dividend is somewhat safer than it seems on the surface, though it will probably be cut if the company faces an unexpected headwind. Overall, Telephone & Data Systems has an exceptional dividend growth record but its dividend is much less reliable than the dividend of Southern.
Fortify With Fortis
Fortis is the largest publicly traded utility in Canada. It has operations in Canada, the U.S. and the Caribbean and it is cross-listed in Toronto and New York. Fortis has $46 billion of assets; 63% of the assets are in the U.S., 34% in Canada, and 3% in the Caribbean; 82% of the assets are regulated electric utility assets, 17% are regulated gas and only 1% is non-regulated.
The primary competitive advantage of Fortis is its size and scale. In addition, Fortis is unique for its cross-border exposure. Its timely acquisitions of U.S. regulated utilities over the last decade have led the company to now generate more than half of its revenue from the U.S.
Fortis has grown its earnings per share by 4.8% per year and its dividend by 6.1% per year on average over the last nine years. The company has a 5-year capital plan of $14.97 billion (at the current conversion of Canadian dollars to U.S. dollars) and expects its mid-year rate base to grow at a compound annual growth rate of approximately 6%, from $23.27 billion in 2021 to $31.13 billion in 2026. Thanks to the reliable growth of its rate base, Fortis has provided guidance for 6% average annual growth of earnings per share until 2025.
Moreover, Fortis has an exceptional dividend growth record, with 49 consecutive years of dividend growth. The stock is currently offering a nearly 10-year high dividend yield of 4.3%. Thanks to its healthy payout ratio of 75%, its decent balance sheet and its resilience to recessions, the company is likely to continue raising its dividend for many more years. Overall, investors can lock in a nearly 10-year high dividend yield and rest assured that the dividend will remain on the rise for the next several years.