The utilities sector has historically attracted investors looking for low-volatility returns and above-average dividend yields. Two utilities stocks that are likely to serve investors satisfactorily in the current environment are Consolidated Edison (NYSE: ED) and Atmos Energy Corporation (NYSE: ATO). They are the sixth-largest and second-largest players in the regulated electric and regulated gas industries, respectively.
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Utilities stocks usually have a solid advantage. The utilities sector’s constituents are generally regulated, and their business models are very capital intensive. This ensures that each major utility is the dominant player in its area of operations, which translates to a great moat and minor competitive forces affecting its performance.
With widespread uncertainty currently spooking the markets, utilities remain great picks, especially for income-oriented and dividend-growth investors. This is due to their qualities and stable dividends that can shield investor returns from the ongoing intensified volatility.
However, the reason I have specifically selected these two stocks to praise in the current environment is that they feature the most extended dividend-growth track records in the utility sector as a whole. Consolidated Edison features 48 years of consecutive annual dividend hikes, while Atmos Energy features 38. Thus, both companies have demonstrated their ability to deliver growing capital returns to investors during harsh economic environments more than once.
That said, both stocks appear rather pricy, and thus, I am neutral on both names.
Stable Performances Backed by Stable Consumption Levels
With electricity and gas comprising necessities for households and businesses, Consolidated Edison and Atmos Energy have historically produced very stable cash flows, as evident by their prolonged dividend-growth track records. In their most recent results, the two companies continued to perform resiliently despite the underlying challenges.
Consolidated Edison’s Q2-2022 Results
In its Q2 results, Consolidated Edison reported revenue growth of 15.2% to $3.42 billion. Adjusted earnings also grew notably, coming in at $228 million ($255 million non-adjusted), or $0.64 per share, against $182 million, or $0.53 per share, in the comparable period last year.
Two noteworthy drivers of earnings growth were higher rate bases for gas, and electric customers, which added $0.04 to earnings-per-share in the company’s New York operations, and the recovery of late payments, which added another $0.04. Finally, another $0.06 was attributed to higher revenues in the company’s clean energy business.
Management reaffirmed its prior guidance for Fiscal 2022, forecasting adjusted earnings per share to land between $4.40 to $4.60 for the year. This implies a year-over-year increase of 2.5% from last year. Additionally, the company also expects to achieve an average rate base CAGR of 7.1% through 2024, providing great visibility in terms of its medium-term earnings growth potential.
Atmos Energy’s Fiscal Q3-2022 Results
Moving on to Atmos, it also produced great fiscal Q3 results, with its consolidated operating income increasing by $21.2 million to $154.6 million compared to last year. The company’s net income also grew to $128.5 million, or $0.92 per share, versus last year’s $102.4 million, or $0.78 per share.
Based on the company’s year-to-date performance, management forecasts Fiscal 2022’s earnings-per-share to be in the range of $5.50 to $5.60. At the midpoint, it implies a year-over-year increase of 8.4%.
Similar to Consolidated Edison, Atmos has requested several rate base case hikes through its subsidiaries in most of the regions it operates in. Accordingly, the company also enjoys a relatively smooth and predictable earnings growth pathway ahead.
ED and ATO’s Dividends are Rock-Solid
Despite the underlying difficulties challenging the overall economy these days, both companies are likely to keep growing their earnings gradually, powered by rate hikes and long-lasting consumption patterns. Accordingly, their payouts should also keep advancing higher – as they have been doing for decades now.
Meeting the minimum requirement of over 25 years of consecutive annual dividend increases, both Consolidated Edison and Atmos are constituents of the S&P 500 Dividend Aristocrats Index.
Over the past decade, Consolidated Edison and Atmos have increased their payouts by a CAGR of 2.7% and 7.0%, respectively. This is due to Consolidated Edison being a far more mature company than Atmos and due to gas utilities enjoying more growth opportunities than electric ones during this period.
That said, Edison has a larger dividend yield of 3.2% over Atmos’ 2.4%, as investors have priced in the difference in their dividend-growth prospects. This is also reflected in the fact that based on each management team’s earnings-per-share outlook for the year, Consolidated Edison’s and Atmos’ payout ratios stand at 70% and 50%. Thus, the latter has much more room ahead to grow payouts at a faster pace.
What are the Price Targets for ED and ATO Shares?
Turning to Wall Street, Consolidated Edison has a Moderate Sell consensus rating based on one Buy, three Holds, and three Sells assigned in the past three months. At $89.86, the average Consolidated Edison price target implies a 7.2% downside potential.
When it comes to Atmos Energy, the stock has a Moderate Buy consensus rating based on four Buys and two Holds assigned in the past three months. At $126.17, the average Atmos Energy price target implies 12% upside potential.
Conclusion: Solid Companies at an Expensive Price
In my view, both Consolidated Edison and Atmos Energy are solid companies whose results should bear no unpleasant surprises. Dividend-growth investors are likely to appreciate Atmos Energy for its more vibrant dividend-growth prospects, while more conservative investors are likely to find better comfort in Consolidated Edison’s juicier yield and even lengthier track record of dividend hikes. That said, based on both companies’ outlooks, ED and ATO trade at P/E ratios close to 21.5x and 20.3x.
These are quite hefty multiples considering both companies are unlikely to grow their earnings faster than in the low-to-mid single digits over the long run. Thus, investors should consider how much they are willing to pay for Consolidated Edison’s and Atmos Energy’s admittedly superior qualities.
