This utility stock checks off several boxes.
I viewed utilities as boring investments for much of my life. The closer I get to retirement, though, the more I realize the truth of the statement, “Boring is beautiful.”
My portfolio now includes several utility stocks. And I recently added another: UGI Corporation (UGI 1.77%). Why did I buy shares of UGI? Three key reasons rank at the top of the list.
1. A resilient business
The last thing I want to invest in these days is a company that could go under because of a bad move or two. UGI isn’t that kind of company because its business is highly resilient.
UGI owns AmeriGas, the largest retail propane distributor in the U.S. It operates natural gas utilities serving customers in Pennsylvania, Maryland, and West Virginia.
The company’s electric utility serves customers in Pennsylvania, and its Energy Services subsidiary operates natural gas pipelines and natural gas storage facilities. UGI also owns a liquified petroleum gas (LPG) distribution unit that serves several European countries.
The company has been in business for 142 years. It expects to deliver average long-term earnings-per-share growth of between 4% and 6%.
Sure, AmeriGas’ earnings have been highly volatile. Last year, Fitch lowered its outlook on the business to negative from stable.
However, UGI is committed to stabilizing AmeriGas by controlling costs and strengthening its balance sheet. Those efforts seem to be bearing fruit, based on the company’s solid fiscal 2024 third-quarter results.
2. An impressive dividend
I’d be lying if I said UGI’s dividend wasn’t an important part of my decision to buy the stock. Its forward dividend yield is an ultra-high 5.95%. Its payout ratio also stands at a reasonable level of 47.8%.
UGI has paid a dividend for 140 consecutive years, and that’s not a typo. The utility company first paid a dividend way back in 1884 and hasn’t missed a beat since. Few dividend stocks have such a reliable track record.
Over the last 10 years, UGI has increased its dividend by a compound annual growth rate of 6%. Granted, the company won’t give shareholders a dividend hike this year and doesn’t expect to do so in fiscal 2025 or 2026, either, as it focuses on strengthening its balance sheet. However, UGI plans to return to increasing its dividend payout by roughly 4% per year in fiscal 2027 and beyond.
3. An attractive valuation
UGI’s share price has trended mainly downward over the last three years. Its AmeriGas challenges served as a primary culprit behind this disappointing performance. However, there’s a positive side effect of the stock’s decline — an attractive valuation.
Zacks Equity Research gives UGI a grade of “A” on valuation, and the stock trades at only 8x forward earnings. That’s less than half the average forward price-to-earnings ratio of 18.8 for the S&P 500 utilities sector.
I might view UGI as a value trap if I didn’t think its future looked brighter than its recent past, but that’s not the case as the company’s financials are improving. It expects to deliver reliable earnings growth going forward.
Plus one bonus
Some investors like to “bet on the jockey and not the horse.” My take is that if the horse is fast enough, it doesn’t matter much who the jockey is. That said, I want solid, capable management in charge of the companies in which I invest.
It was a nice bonus, therefore, when UGI named Bob Flexon as its new CEO, effective Nov. 1, 2024. Flexon served as UGI’s CFO for roughly six months in 2011 and was CEO of power company Dynegy from July 2011 to April 2018. He’s also been CEO of engineering and construction contractor Foster Wheeler and CFO and COO of NRG Energy.
I didn’t load up on UGI stock because Flexon is taking the helm of the company, but he exemplifies the kind of leadership I like to see. With Flexon as CEO, I expect UGI will deliver the steadiness that investors want.
