One such Dividend King, which ranks highly on our watch list, is Vectren Corp. (VVC), a regulated gas and electric utility with 1.2 million customers in Indiana and Ohio.
The utility is on its way to becoming a “majority gas operation,” as its opportunities to replace and enhance its gas infrastructure reshape the company’s earnings profile.
In recent years, Vectren’s gas-distribution business has averaged around 40% of utility profits. But that contribution has been inching higher and hit 47% last year.
At present, Vectren’s electric utility still generates most of its power from coal (1,000 megawatts from coal versus 245 megawatts from gas), and the firm should be able to boost returns as it transitions most of its fleet to gas and renewables.
Vectren recently unveiled an ambitious 10-year capital plan, with $6.5 billion of investments. About 60% of this spending will be allocated toward upgrading and expanding gas-distribution infrastructure, with the balance roughly split between electric grid modernization and cleaner power generation.
Management expects these investments will drive long-term earnings and dividend growth of 6% to 8% annually
In addition to its regulated utilities, Vectren also has a non-utility segment that accounts for about 20% of earnings.
Within this segment, its Infrastructure Services division, which serves Vectren and other utilities, will be able to capitalize on the nationwide trend toward replacing and enhancing gas distribution networks. And its Energy Services business helps develop renewable energy projects.
Right now, Vectren trades at a moderate premium to its peers on a price-to-earnings basis, perhaps in part due to its takeover potential.
But with an enterprise value to EBITDA (earnings before interest, taxation, depreciation, and amortization) ratio of 10.3 times, its valuation remains toward the lower end of the range at which other peers have been acquired.
The company boasts an exemplary record of 57 years of consecutive dividend increases, and growth in the payout is accelerating. With a yield of 2.8%, Vectren is a buy on pullbacks below $55.
Ari Charney is the chief investment strategist for Utility Forecaster, an analyst for Canadian Edge, and managing editor of Jim Finks Options for Income.
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