Idacorp: This Underappreciated Dividend Growth Stock Remains A Buy

seekingalpha05-22

IDACORP's total returns have more than doubled the S&P 500 in the last three months.Lower usage per customer due to weather and higher interest expense caused the electric utility to miss analysts' ...

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A shot of high voltage electric power lines at sunset. imaginima It's not a secret that utilities have been off to the races lately. The Utilities Select Sector SPDR Fund ETF (XLU) has gained 14% year to date. This is ahead of the 12% gains of the S&P 500 index (SP500). That outperformance makes sense, too. U.S. Q1 GDP growth came in at an annual rate of 1.6%, with the first estimate. That was well below the 2.3% consensus and even more of a slowdown from Q4 2023's 3.4% rate.   CME FedWatch Tool This has the market currently pricing in an 86.6% probability of at least two rate cuts between now and the end of next April. The macroeconomic environment implies that growth forecasts are coming down. In periods of reduced growth, more defensive sectors like utilities tend to do well. One of my more recent buy ratings was on the mostly Idaho-based electric utility, IDACORP (NYSE:IDA). When I initiated coverage in IDA with a buy rating in February, I liked it for several reasons. First, the company operated in a service area with above-average economic growth. My thought was that this would lead to steady earnings growth over time. Second, the company had an investment-grade balance sheet. Third and finally, relative to fair value, shares also appeared to be moderately discounted. Since that time, IDA has delivered 11% total returns since my inaugural article. That was ahead of the S&P 500's 5% total returns over the same time. Today, I will be going over the company's first-quarter earnings results, which were shared on May 2. Despite a diluted EPS miss, I continue to believe in the future of this business. That's because my hunch is that service area growth will overcome likely temporary headwinds like unfavorable weather patterns. IDA also remains a financially sound business. Lastly, the valuation could still position the company for double-digit annual total returns over the next few years. Forget The First Quarter, The Story Remains Intact   IDA Q1 2024 10-Q Filing IDA's operating revenue edged higher by 4.5% year-over-year to $448.9 million during the first quarter ended March 31, 2024. This was $55 million ahead of the analyst consensus for the quarter per Seeking Alpha. There were a few factors behind this topline growth rate. First, the economic prospects of IDA's service area remain robust (more on that to come in a bit). That is what helped the company's total customer count higher by 2.5% over the year-ago period to top 636,000 in the first quarter. Second, the 2023 Idaho general rate case settlement went into effect on January 1 of this year, according to CFO Brian Buckham's opening remarks during the Q1 2024 Earnings Call. That led to a net increase in retail revenue per megawatt hour per Buckham. These tailwinds were offset by a $9.1 million operating revenue decrease in usage per retail customer during the first quarter. Rather than an issue with IDA, this was because of generally mild weather for the first quarter. Buckham noted that heating degree days were 6% below normal for the first quarter and 13% lower than the year-ago quarter. IDA's diluted EPS fell by 14.4% year-over-year to $0.95 in the first quarter. That came up $0.19 short of the analyst consensus for diluted EPS according to Seeking Alpha. Higher operating revenue was offset by an uptick in interest expense on long-term debt. Coupled with the milder weather patterns, this is what led to a 230 basis point downtick in the net profit margin to 10.7% during the first quarter.   IDA Q1 2024 Earnings Presentation Despite these results, IDA had the conviction to reiterate its diluted EPS guidance for 2024. This guidance calls for a midpoint of $5.35 ($5.25 to $5.45), which would represent a 4.1% growth rate over the 2023 base of $5.14. The analyst consensus per FAST Graphs is that results will come in at the top end of guidance for 2024 ($5.38 is the consensus for this year). I agree with this forecast as well. For one, IDA's 2023 general rate case that went into effect to begin this year will help operating results in the quarters to come. The company's economically booming service area also helps. Moody's thinks that IDA's service area will post 4.6% GDP growth in 2024 and 3.6% GDP growth in 2025. President and CEO Lisa Grow also noted in her opening remarks that some potential new large-load customers have recently paid for their construction studies. That should help to sustain customer growth in the quarters and years ahead. As weather normalizes, IDA's operating results should as well. This is why I believe the $4.43 analyst diluted EPS consensus (versus $4.03 for the final three quarters of 2023) for what remains of 2024 is attainable. Looking beyond this year, the analyst consensus is that diluted EPS will rise by 7.3% to $5.77. Aside from the factors I already discussed, IDA also plans to file a limited scope rate case on May 31. This will account for capital additions through the end of 2024 and labor increases per Grow. That should be another growth catalyst within the next few quarters for IDA. The electric utility remains financially solvent as well. IDA's interest coverage ratio was 2.3 in the first quarter. This isn't exceptionally high for an electric utility, but it's enough given the weather headwind and steady profile of regulated utilities. IDA's 49% debt-to-capital ratio was also better than the 60% that rating agencies prefer from the industry, per the Zen Research Terminal. So, these elements are why the company has a BBB credit rating from S&P on a stable outlook (unless otherwise noted or hyperlinked, all details in this subhead were sourced from IDA's Q1 2024 10-Q Filing, IDA's Q1 2024 Earnings Press Release, and IDA's Q1 2024 Earnings Presentation). Fair Value Is Nearing $110 A Share   FAST Graphs, FactSet Shares of IDA aren't quite as undervalued as they were three months ago with the rally, but there is arguably still some value at the current $98 share price (as of May 20, 2024). The company's current-year P/E ratio of 18.2 is below its 10-year normal P/E ratio of 20.2 per FAST Graphs. Now, interest rates will likely be somewhat higher in the years to come versus the average of the past 10 years. However, IDA's growth prospects have improved from 3.9% annually in the last 10 years to the forward estimate of around 6%. That is why I'm going to be splitting the difference between the current valuation multiple and the 10-year multiple at 19.2. Looking at the calendar, ~60% of 2024 has yet to happen, with another ~40% of 2025 ahead in the coming 12 months. Weighing the $5.38 2024 diluted EPS consensus and the $5.77 2025 diluted EPS consensus, I get a 12-month forward earnings input of $5.54. Plugging the 12-month forward earnings input in with a 19.2 valuation multiple, I get a fair value of $107 a share. This would imply IDA is 8% undervalued from the current share price. More Steady Dividend Growth Should Lie Ahead   The Dividend Kings' Zen Research Terminal IDA's 3.4% forward dividend yield doesn't stand out compared to the utilities sector median of 3.8%. This earns it a C for forward dividend yield from Seeking Alpha's Quant System. However, the dividend appears to be quite safe. That's because IDA's 61% EPS payout ratio is below the 75% EPS payout ratio that rating agencies want to see from electric utilities. This leaves the company with an appropriate buffer. Provided IDA meets the 2024 diluted EPS consensus and pays $3.36 in dividends per share (factoring in an $0.87 Q4 dividend per share), the payout ratio would be 62.5%. That's still a low enough payout ratio that I believe dividend growth can track the mid-single-digit annual earnings growth that I'm expecting long-term. Risks To Consider IDA is an intriguing utility, but the risk profile means that it isn't for everyone. Just as I explained in my prior article, the electric utility is very geographically concentrated. Most operating revenue is derived within Idaho, with the remainder coming from Oregon. That means the company's future depends on constructive regulatory outcomes. If IDA can't secure such outcomes, its fundamentals could be harmed. The risk of natural disasters is also worth noting. This is because such events could interrupt the company's operations and damage its infrastructure beyond insured amounts. That could hurt IDA's earnings power. Lastly, the company's generation mix is becoming more dependent on hydropower plants. From 2021 to 2023, hydropower's share of total generation climbed from 48% to 55% (page 11 of 199 of the most recent 10-K filing). If water management issues arise, that could weigh on IDA's fundamentals. Summary: IDA May Still Be Buyable  In my view, shares of IDA could still be a buy here. The company's service area outlook remains promising. IDA's balance sheet is investment-grade. Shares are also reasonably valued enough that there is a relatively high likelihood for double-digit annual total returns through 2026 in my opinion.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.0","shortVersion":"4.24.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2437630372"}