Utility stocks are great candidates for the portfolios of income-oriented investors. Most utilities have invested excessive amounts on infrastructure and hence it is essentially impossible for new competitors to enter their markets. As a result, most utilities enjoy a wide moat in their business. They are also immune to recessions thanks to the essential nature of their business and enjoy reliable rate hikes year after year, as regulators need to encourage utilities to expand and maintain their networks. Utilities thus offer reliable dividend growth and above-average dividend yields. In this article, we will discuss the prospects of three top-rated utilities right now.

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South Jersey Industries (SJI)

South Jersey Industries buys, transports, stores, and sells natural gas. After the acquisition of Elizabethtown Gas in 2018, South Jersey has become the second-largest natural gas utility in New Jersey. The company owns approximately 10,000 miles of distribution and transmission pipeline and serves more than 700,000 total customers. Its revenue is 70%-80% regulated and 20% - 30% unregulated.

South Jersey has proved extremely resilient to the coronavirus crisis. While many companies came under great pressure last year due to the fierce recession caused by the pandemic, South Jersey posted all-time high earnings per share of $1.68.

In the third quarter, the customer growth and increased profits in the regulated business were more than offset by losses in the non-regulated divisions. As a result, the utility posted a loss of -$0.23 per share. However, this business is characterized by high seasonality, with most profits realized during the winter. South Jersey is on track to earn approximately $1.60 per share this year, which will mark the second-best performance of the company in its history.

South Jersey has more than doubled its revenue over the last decade but it has grown its earnings per share by only 1% per year on average, primarily due to the gyrations of natural gas prices and the issuance of new shares. The company can grow its bottom line at a low single-digit rate in the upcoming years thanks to the approval of rate hikes by regulatory authorities.

Moreover, South Jersey recently raised its dividend by 2.5% and thus it is now offering an attractive 5.0% dividend yield. The company has raised its dividend at a 2.8% average annual rate over the last five years, which is lower than the 5.9% average annual rate of the utility sector. However, the 5.0% yield of South Jersey is much higher than the 3.3% average yield of the sector. Given also its reasonable payout ratio of 76% and its solid balance sheet, South Jersey has ample room to keep raising its dividend for many more years.

Sempra Energy (SRE)

Sempra Energy serves one of the largest utility customer bases in the U.S., as it distributes natural gas and electricity in Southern California (over 20 million customers) and owns a majority stake in Texas-based Oncor, a transmission and distribution business with more than 10 million customers.

Sempra Energy benefits from two key trends, namely the transition towards clean energy resources and the advance of the U.S. as a global energy leader. The company has also proved rock-solid throughout the pandemic. It grew its earnings per share 18% last year, to a new all-time high, and is on track to achieve another record in earnings per share this year.

In the most recent quarter, Sempra Energy grew its earnings per share 14% over last year’s quarter thanks to strong momentum in all its segments. The utility has exceeded the analysts’ consensus in 11 of the last 13 quarters. Management reaffirmed its bright outlook for the business by raising the dividend by 5%. It also reiterated its guidance for earnings per share of $8.10-$8.70 in 2022. This guidance implies more than 5% annual growth, as this management has a tendency to issue conservative estimates.

Sempra Energy enjoys great economies of scale thanks to its regulated monopolies in California and Texas. In addition, the company has a 5-year capital plan of $32 billion, which will be a major growth driver in the upcoming years. Oncor expects to grow its rate base to nearly $28 billion by 2026, thus implying 8% average annual growth. Overall, Sempra Energy can be reasonably expected to grow its earnings per share by about 5% per year on average in the upcoming years. The utility has grown its earnings per share at a 4.3% average annual rate over the last decade.

Moreover, Sempra Energy is offering a 3.5% dividend yield. While this yield is only slightly above the average of the sector, it is important to note that the company has grown its dividend at an 8.6% average annual rate over the last decade. This is more than double the average growth rate of 4.0% of the sector. Given the solid payout ratio of 55% of Sempra Energy and its healthy balance sheet, investors should lock in its 3.5% dividend and rest assured that the dividend will continue rising significantly for many more years.

ONE Gas (OGS)

ONE Gas is one of the largest publicly traded natural gas utilities in the United States. The company provides natural gas distribution services to approximately 2.2 million customers. ONE Gas is the largest natural gas distributor in Oklahoma, with a market share of 88%, and Kansas, with a market share of 72%, while it is the third-largest in Texas, with a market share of 13%. Its customers are residential, commercial and transportation-related.

Just like the other two utilities mentioned above, ONE Gas has proved immune to the pandemic thanks to the essential nature of its business. Even under the worst economic conditions, consumers do not reduce their consumption of natural gas. This is clearly reflected in the business performance of ONE Gas, which posted record earnings per share last year and is on track for another record this year.

In the most recent quarter, ONE Gas grew its revenues 12% over last year’s quarter thanks to customer growth, strong demand for natural gas and price hikes approved by regulators. Earnings per share dipped 5% but only due to changes in employee benefit plans, which is a non-recurring issue. Thanks to positive business momentum, management improved its guidance for the annual earnings per share from $3.68-$3.92 to $3.80-$3.90.

Thanks to its dominant business position, ONE Gas has grown its earnings per share every single year over the last decade, at an 8.5% average annual rate. This is certainly an enviable growth rate for a utility company. Given sustained customer growth and the reliable rate hikes that regulators approve, ONE Gas is likely to grow its earnings per share at least at a mid-single digit rate in the upcoming years.

Moreover, ONE Gas is currently offering a 3.4% dividend yield. Thanks to its decent payout ratio of 61%, its healthy balance sheet and its reliable growth trajectory, the utility is likely to keep raising its dividend meaningfully for many more years. As management targets a payout ratio of 55%-65%, dividend should grow roughly in line with earnings growth, i.e., at a mid-single digit rate.

Final Thoughts

The merits of investing in utility stocks is evident in the analysis of the above three stocks. These stocks have proved immune to the pandemic, as they have posted record earnings during this crisis. As a result, their shareholders were protected from the extreme and painful volatility caused by the pandemic last year. In addition, the above stocks offer attractive dividends, with a wide margin of safety and reliable growth prospects ahead. Overall, they provide a safe haven to income investors, especially during rough economic periods.