Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas. – Paul Samuelson
South Jersey Industries, Inc. (SJI) is an energy services holding company operating a regulated natural gas utility business, a midstream pipeline business, and an energy solutions business. Over 90% of operating income year-to-date has come from the regulated business, which is the largest stand-alone natural gas utility in New Jersey. With two gas distribution utilities, South Jersey Gas (SJG) and Elizabethtown Gas (ETG), the company serves roughly 700,000 customers.
Source: Company Materials
As a natural gas utility, SJI earns the bulk of its profits during the quarters spanning the winter months (first and fourth). SJI has guided to full-year 2020 earnings of $1.50 to $1.60 per share, and consensus estimates are for $1.53 per share, with the seasonal split as shown below. Longer term, results should rise with growth in the population of the customer base.
Compared to most companies, the impact on SJI due to COVID has been minor. Demand has not been materially impacted and employees continue to work, albeit after a brief halt from March to June for those replacing utility infrastructure. The regulatory process continues to function remotely with the New Jersey Board of Public Utilities (NJBPU) approving an order in July allowing for the deferral and ability to file for the recovery of prudently incurred COVID expenses.
Capital and Liquidity
SJI has an attractive dividend yield of 5.8%, much higher than the broader market at less than 2%, and the higher yield is consistent with other utility peers. During the first half of 2020, SJI issued both debt and common stock to take advantage of liquidity in the market to improve its capital position. SJI is prepared for the conversion of mandatory convertible equity units due in 2021, after which it has no material debt maturities until 2027, clearing up its funding questions for the next few years.
With estimates for full-year earnings of $1.53, SJI’s stock currently trades at a forward P/E of 13.3x, which is a very reasonable price for the steady business. The stock has not benefited from the broader market increase this summer, which focused on higher growth names. With an attractive valuation and generous dividend yield, I would recommend investing in SJI.
Risks to ownership
- As a regulated utility, SJI has an ongoing need to maintain and replace natural gas infrastructure. This requires sizeable capital expenditures on a recurring basis. However, SJI has a proven track record of suitably planning these expenditures.
- A prolonged economic downturn could negatively impact customers’ abilities to pay natural gas utility bills to SJI. This has not harmed earnings so far, and further fiscal stimulus later this year should abate these concerns.
With recent debt and equity offerings, SJI is well-positioned to weather any volatility in results due to the current turmoil. However, I expect volatility to be muted based on results reported to date. The benefit of a regulated utility is the steadiness of operations. Meanwhile, the dividend yield and valuation are attractive, providing a solid opportunity for investors.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Read More: Business As Usual At South Jersey Industries, Inc. (NYSE:SJI)