Dividend Kings In Focus: National Fuel Gas

In 2020, National Fuel Gas (NFG) raised its dividend for the 50th consecutive year. That puts the company among the elite Dividend Kings, a small group of stocks that have increased their payouts for at least 50 consecutive years. You can see the full list of all 30 Dividend Kings here.

National Fuel Gas has remained a relatively small company, trading at a market capitalization of just $3.7 billion. However, a small market cap is not a negative feature when investing; quite the contrary.

Despite its small size, National Fuel Gas has promising growth prospects and an attractive valuation and hence it is likely to offer compelling returns to its shareholders in the upcoming years. In addition, its 4.4% dividend yield is much higher than the broad market’s yield (1.6%), and there is a lot of room for more dividend raises down the road.

Business Overview

National Fuel Gas is a diversified and vertically integrated company that operates in four segments: Exploration & Production, Pipeline & Storage, Gathering, and Utility. The upstream segment (exploration & production) is by far the most important one, as it generates 42% of the EBITDA of the company. Given also that natural gas comprises approximately 90% of the output of the company, it is easy to understand the high sensitivity of its earnings to the underlying price of natural gas.

The midstream division (pipeline & storage and gathering) generates 37% of EBITDA while the downstream segment (utility) generates the remaining 21% of EBITDA.

While National Fuel Gas seems to be a pure commodity stock on the surface, with all the disadvantages related to the boom-and-bust cycles of commodity producers, the company has a superior business model when compared to commodity producers. Thanks to its vertically integrated business model, it enjoys great synergies.

(Click on image to enlarge)

Source: Investor Presentation

Its midstream and downstream businesses provide a strong buffer when the price of natural gas decreases. Moreover, the company enjoys higher returns on its investments, as both its upstream and midstream divisions benefit from its investments in production growth projects.

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