Investors seeking dividend-growth companies that feature minimum volatility characteristics have a hard time these days. Real estate used to be the go-to sector for growing dividends, but with the retail and office market remaining gloomy and the residential market threatened by higher interest rates, this is no longer the case.
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The consumer staples sector also used to have many low-volatility dividend-growth opportunities, but inflation has been squeezing the margins of these companies.
Finally, such opportunities can often be found among utilities. While the sector has gotten expensive, I believe one company, in particular, stands out that is worth examining. The company is ONE Gas, Inc. (NYSE: OGS), which in my view, features exceptional dividend growth and low-volatility traits.
As investors are likely to appreciate this quality in such an uncertain market environment, I am bullish on the stock.
Why is OGS the Ultimate Low-Volatility Dividend-Growth Play?
There are multiple characteristics that make ONE Gas look like one of the best low-volatility dividend-growth plays in the market these days. One of them, which contributes to its stability, is the company’s market position. Basically, ONE Gas supplies natural gas to approximately 2.3 million customers via 41,600 miles of distribution mains and 2,400 miles of long transmission pipelines.
The company’s extended distribution network has allowed it to capture large market shares in its operational areas. In fact, ONE Gas is the leading natural gas distributor in Kansas and Oklahoma and the third-largest in Texas. ONE Gas’s market share in each of these states by the number of customers is 72%, 88%, and 13%, respectively. Hence, the company has a wide moat, especially in two of the three states it has a presence in, which is also a great competitive advantage.
Further, ONE Gas’s distribution rates are decided by the regulatory authorities of each state, which have to make sure utility companies have the opportunity to earn a fair and decent return on their capital employed.
Because the rate hikes permitted by regulators are quite predictable in the case of ONE Gas, the company has managed to provide extremely narrow outlook estimates concerning its medium-term net income and dividend growth prospects.
Particularly, management anticipates base rate hikes to be between 8% and 9% through 2026. With this catalyst, combined with an expanding customer base over time, unchanging natural gas consumption patterns, and pre-determined CapEx needs, the company expects that its annual earnings per share will increase by between 6% and 8% over the same period.
Having the luxury of forecasting such a narrow earnings-per-share growth course enables management to provide an analogous dividend growth outlook. Thus, management also expects that ONE Gas’s dividend hikes will also range between 6% and 8%, which is a great aspect in terms of driving strong investor confidence in the stock.
For as long as I have been researching various companies, I have encountered few to none that have provided guidance that is so specific for such a long forward-looking period. For this reason, ONE Gas appears to be one of the most dependable companies when it comes to predicting its medium-term total return potential. This is why I consider the stock one of the ultimate low-volatility dividend-growth plays.
Q2 2022 Results: Another Stable Quarter
The strength of ONE Gas’s ability to deliver stable results was once again demonstrated in its most recent results. For Q2 2022, the company posted $429 million in revenues, implying year-over-year growth of 35.9%. Revenues were uplifted by strong demand for natural gas, gradual customer growth, and rate hikes.
Operating costs grew as well, but revenue growth exceeded these, resulting in meaningful operating income growth. Specifically, operating income came in at $58.6 million compared to $51.1 million in the prior-year period.
The gain was powered by rate increases of $14.4 million and a $1.5 million year-over-year improvement in residential sales, driven by net customer growth in Oklahoma and Texas, partially offset by an increase in outside service costs, costing the company nearly $6 million.
Hence, EPS improved as well, expanding from $0.56 to $0.59 year-over-year. Due to the ongoing positive momentum seen lasting throughout the year, management reaffirmed their previously provided guidance, still expecting ONE Gas’s FY-2022 EPS to land between $3.96 and $4.20.
The midpoint of this range indicates year-over-year EPS growth of 6%, which also matches management’s medium-term EPS growth guidance. It’s worth noting that the company has historically performed toward the higher end of its guidance. Therefore, EPS growth could end up close to 7%, further converging toward the midpoint of management’s growth targets through 2026.
Is OGS Stock a Buy?
Turning to Wall Street, ONE Gas has a Hold consensus rating based on one Buy and three Holds assigned in the past three months. At $89.00, the average ONE Gas stock forecast suggests 10.2% upside potential.
Conclusion: ONE Gas is a Solid Dividend-Growth Play
Considering we are currently experiencing a very volatile trading environment loaded with numerous uncertainties, ONE Gas could be a worthwhile pick for conservative dividend-growth investors, as the company is set to produce improving results at an exceptionally predictable pace.
Based on the midpoint of management’s EPS guidance, the stock is now trading at a forward P/E of roughly 19.8x. In my view, this is not a cheap multiple, but investors should continue to pay a premium for the company’s unique traits.
Further, while the present dividend yield of about 3.1% is not enormous, it should definitely contribute strongly to the stock’s total-return prospects and investors’ total return visibility.
