Dividend Kings In Focus: National Fuel Gas

Moreover, National Fuel Gas is currently offering a 4.4% dividend yield, which is more than twice the dividend yield of the S&P 500. Given the healthy payout ratio of 62% and the decent balance sheet of the company, the dividend can be considered safe for the foreseeable future.

Management has consistently targeted a payout ratio around 50% throughout the last decade but the payout ratio has somewhat increased this year due to the downturn from the pandemic. Nevertheless, a payout ratio of 62% amid the worst recession of the last decade is certainly healthy and confirms the safety of the dividend. We expect National Fuel Gas to continue raising its dividend for many more years.

Valuation & Expected Returns

National Fuel Gas is currently trading at 14.4 times its expected earnings of $2.85 per share this year. This earnings multiple is much lower than the average price-to-earnings ratio of 17.5 over the last decade. If the stock reverts to its average valuation level over the next five years, it will enjoy a 4.0% annualized gain in its returns.

Given 6% expected earnings-per-share growth, the 4.4% dividend, and a 4.0% annualized expansion of the price-to-earnings ratio, we expect National Fuel Gas to offer a 13.2% average annual return over the next five years. This makes the stock a buy in our view.

Final Thoughts

National Fuel Gas generates nearly half of its earnings from the production of natural gas. Consequently, it is highly sensitive to the gyrations of the price of natural gas. On the other hand, its midstream and utility segments provide a strong support to its results during downturns.

Overall, the midstream and utility segments provide reliable cash flows while the upstream segment offers significant growth potential thanks to strong production growth and a potential improvement in the price of natural gas off its current suppressed level, which has been caused by the pandemic.

In addition, thanks to the pandemic, National Fuel Gas is cheaply valued right now. Thanks to its promising growth prospects, its 4.4% dividend, and its cheap valuation, we believe the stock is likely to offer compelling returns going forward.

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Disclosure: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities.

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