Company Description: Northwest Natural Gas Co. is a natural gas utility that provides service to some 611,000 residential, 62,000 commercial and 1,000 industrial customers in Oregon and southwestern Washington.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
NWN is trading at a premium to all four valuations above. The stock is trading at a slight discount to its calculated fair value of $44.67. NWN earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
NWN earned one Star in this section for 3.) above. NWN earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1952 and has increased its dividend payments for 58 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
NWN earned a Star in this section for its NPV MMA Diff. of the $665. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as NWN has. The stock's current yield of 4.25% exceeds the 2.71% estimated 20-year average MMA rate.
Memberships and Peers: NWN is, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: The Portland General Electric Co. (POR) with a 3.7% yield, Piedmont Natural Gas Company (PNY) with a 3.7% yield and WGL Holdings Inc. (WGL) with a 3.9% yield.
Conclusion: NWN earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks NWN as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $47.42 before NWN's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 58 years of consecutive dividend increases. At that price the stock would yield 3.8%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 0.6%. This dividend growth rate is below the 1.7% used in this analysis, thus providing a margin of safety. NWN has a risk rating of 1.25 which classifies it as a Low risk stock.
NWN has a good combination of fundamentals, valuation and history. However, its free cash flow payout of 184% is well-above the the 60% I look for and its debt to total capital of 54% is above my 45% maximum. Although the stock is trading at a discount to my calculated fair value of $44.67, I will not be adding to my position until the free cash flow payout comes down to a reasonable level.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in NWN (1.2% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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Tags: [NWN] [POR] [PNY] [WGL]