Sempra: This Dividend Growth Stock Is Worth Buying Now

seekingalpha07-16

Sempra is a public utility and energy infrastructure company with a 13-year dividend growth streak.The company is positioned to generate 6% to 8% annual adjusted EPS growth for the foreseeable future....

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the stock could be priced at a 9% discount to fair value.SRE could be set up to post nearly 30% cumulative total returns through 2026.  High voltage electric power lines at sunset. imaginima My work here on Seeking Alpha occasionally includes coverage of stocks with exceptionally high growth prospects, such as Amazon (AMZN). Even as a dividend growth investor, that's because I believe a handful of growth stocks are must-owns for me at this phase of my investing journey. However, the vast majority of my coverage here on Seeking Alpha focuses on established dividend growers. In my view, these high-quality investments can provide steadily growing streams of passive income and help me to put less emphasis on market volatility. That prevents me from acting irrationally (e.g., panic selling) and keeps me focused on my North Star: Consistently rising passive income. Although Sempra (NYSE:SRE) is one of the 500 stocks comprising The Dividend Kings' Zen Research Terminal, it didn't come onto my radar until just recently. Today, I'll be initiating coverage in the regulated utility and energy infrastructure company with a buy rating. SRE's extensive regulated natural gas and electric utility operations and energy infrastructure operations should lead to an encouraging growth outlook in the years to come. The company's balance sheet is solidly investment-grade. SRE also looks to be undervalued, which is what seals the deal on my buy case. Growth Tailwinds Abound SRE is a major regulated electric and gas utility with energy infrastructure operations as well. The holding company serves almost 40 million consumers throughout North America. SRE operates in the following three segments:  Sempra California: This segment includes the San Diego Gas & Electric Company and Southern California Gas Company subsidiaries. As of December 31, 2023, the former served 3.6 million electric customers and 3.3 million natural gas customers in a roughly 4,100 square mile service territory in San Diego County and Orange County. The latter owns and operates a natural gas transmission and storage system that delivers natural gas to around 21 million people in a 24,000-square-mile service territory throughout Southern and Central California. Sempra Texas Utilities: The segment owned an 80.25% interest in the regulated electricity transmission and distribution utility, Oncor. Operating in the north-central, eastern, western, and panhandle regions of Texas, and serving 13 million people, this is the largest transmission and distribution system in Texas. Sempra Infrastructure: This segment owned a 70% interest in Sempra Infrastructure Partners as of December 31, 2023. This business owns and operates natural gas infrastructure assets, LNG infrastructure assets, and renewable energy assets in the U.S. and Mexico. That includes 1,850 miles of natural gas transmission pipelines (and 136 miles under construction), 16 natural gas compression stations (one under construction), and 139 miles of ethane pipelines in Mexico.  Sempra Energy Q1 2024 10-Q Filing On May 7, SRE shared its financial results for the first quarter ended March 31, 2024. The company's total revenue plunged by 44.5% year-over-year to $3.6 billion during the first quarter. For perspective, that was $1.9 billion below Seeking Alpha's analyst consensus. Initially, this gives the impression that something is fundamentally wrong with SRE. However, I don't believe that is the case. The bulk of SRE's topline decline in the first quarter had to do with its natural gas operations. The company's natural gas revenue tumbled by 52.2% over the year-ago period to $2.1 billion for the first quarter. That was because the amount that SRE can charge to customers as a regulated utility depends on its natural gas costs. Since these were down by $2.2 billion, that explains the sharp drop in natural gas business revenue. SRE's energy-related business revenue fell by 57.6% year-over-year to $475 million during the first quarter. Unrealized losses versus unrealized gains in the year-ago period and lower natural gas prices were behind this topline decrease. SRE's electric revenue grew by 2.8% over the year-ago period to nearly $1.1 billion in the first quarter. The recognition of income tax credits from standalone energy storage projects and higher revenue from transmission operations were to credit for this topline growth. SRE's adjusted diluted EPS fell by 8.2% year-over-year to $1.34 for the first quarter. That was $0.05 ahead of Seeking Alpha's analyst consensus. The company's much lower natural gas costs resulted in a 940 basis point expansion in its non-GAAP net profit margin to 23.5% during the quarter. That largely made up for the substantially lower revenue base in the quarter. This is why adjusted diluted EPS contraction fared better than revenue contraction for the quarter. Sempra Energy Q1 2024 Earnings Presentation SRE was confident enough to affirm its 2024 adjusted diluted EPS guidance range of between $4.60 and $4.90. At the midpoint, this would represent a 3% growth rate over 2023's base of $4.61. The company also affirmed its 2025 adjusted diluted EPS guidance of between $4.90 and $5.25. From the midpoint, this would equate to a 6.8% growth rate over the 2024 midpoint adjusted diluted EPS of $4.75. The FAST Graphs analyst consensus of $4.80 in adjusted diluted EPS in 2024 and $5.14 in adjusted diluted EPS in 2025 fall within company guidance ranges as well. Behind these healthy growth forecasts are several notable catalysts. For one, SRE's proposed decision from the California Public Utilities Commission should be released in the coming days/weeks. A final decision is expected by the end of the year. That could be a tailwind for 2025 and beyond. Another positive for SRE is the inaugural System Resiliency Plan for $3 billion of capex recently filed with the Public Utilities Commission of Texas. PUCT is expected to decide on this before the end of the year. That could provide yet another boost to SRE's near-term growth. Looking out longer term, the Electric Reliability Council of Texas or ERCOT anticipates that the state's electric load has plenty of room for future growth. According to CFO Karen Sedgwick's opening remarks during the Q1 2024 Earnings Call, ERCOT is forecasting a 40% higher load in 2030 than in last year's report. Positive demographic trends throughout Texas are powering this encouraging outlook. Sempra Infrastructure is making significant progress on major growth projects as well. The company's ECA LNG Phase 1 project is 80% complete and Sedgwick remarked that it remains on target to begin commercial operations in Summer 2025. Big picture, SRE plans to spend $48 billion in capital over the next five years to execute on its 6% to 8% annual adjusted diluted EPS growth target. SRE also looks to have the financial prowess to fund these growth projects. The company's interest coverage ratio was 3.4 in the first quarter. That's a fair interest coverage ratio for a regulated utility. If that wasn't enough, SRE's 47% debt-to-capital ratio is comfortably below the 60% debt-to-capital ratio that rating agencies desire from the industry per The Dividend Kings' Zen Research Terminal. This explains the company's BBB+ credit rating from S&P on a stable outlook (unless otherwise sourced or hyperlinked, all details in this subhead were according to SRE's 10-K Filing, SRE's Q1 2024 10-Q Filing, SRE's Q1 2024 Earnings Presentation, and SRE's Q1 2024 Earnings Press Release). Fair Value Is Nearly $85 A Share FAST Graphs, FactSet SRE's fundamentals are promising, and the stock could be at least somewhat undervalued right now. The regulated utility is priced at a current-year P/E ratio of 15.9, which is below the 10-year normal P/E ratio of 18.7 per FAST Graphs. SRE's forward annual adjusted diluted EPS growth outlook of 6.3% is in line with the 10-year average annual growth rate of around 7%. Coupled with interest rates likely being moderately above the 10-year average in the years to come, this is why I believe a fair value multiple of 16.9 is reasonable. That would be one standard deviation less than the 10-year normal P/E ratio. The calendar year 2024 will be 56% complete after this week. That means another 44% of 2024 and 56% of 2025 are still to come in the next 12 months. This is how I get a 12-month forward adjusted diluted EPS input of $4.99. Plugging that in with the aforementioned fair value multiple, I get a fair value of $84 a share. That's equivalent to a 9% discount to fair value from the current $76 share price (as of July 15, 2024). If SRE can match the growth consensus and return to fair value, it could generate 29% cumulative total returns by the end of 2026. More Mid-Single-Digit Dividend Growth On The Way The Dividend Kings' Zen Research Terminal SRE's 3.2% forward dividend yield is below the utilities sector median forward yield of 4%. That explains the C- grade from Seeking Alpha's Quant System for forward dividend yield. SRE offsets this lower starting income with a very secure payout ratio. The company is slated to pay $2.455 in dividends per share in 2024. Against the $4.80 adjusted diluted EPS analyst consensus for the year, this would be a 51.1% payout ratio. That's far below the 75% that rating agencies prefer from the industry, which provides SRE the flexibility to deliver dividend growth in line with earnings growth. This earns the company an A- grade from the Quant System for dividend safety. In my view, this low payout ratio also makes it likely that SRE will continue to build on its 10-year compound annual dividend growth rate of 6.6% (better than the sector median of 5.2%). That makes the stock an interesting dividend growth pick from my perspective. Risks To Consider SRE is a utility that has several factors working in its favor. However, there are still risks to the investment thesis that warrant a mention. SRE's concentration of its regulated utility operations in California and Texas is positive in that these are two of the United States' most robust economies. The downside to this concentration is that the company is dependent on optimal regulatory outcomes for its growth prospects to be maintained. If SRE encounters unfavorable rate case decisions in either of these markets, its growth potential could be damaged. Geographically, the concentration of SRE's operations in these two states could also come with natural disaster risk. If major storm systems, earthquakes, etc., hit the company's service territories, the utility's operations could be disrupted. SRE's infrastructure could also be damaged, which could force the company to pay out-of-pocket costs. If that damage was severe enough, it could be beyond the scope of the company's commercial insurance coverage. This could impair SRE's earnings power. The massive size and scale of the company also make it a prime target for attempted cyber breaches from various parties. If a significant breach happened, SRE's business could be interrupted. Sensitive data could be compromised on a large scale as well. This could lead to sizable litigation against the company. Summary: Sempra Is An Undervalued Dividend Growth Stock  SRE has a clear path to 6% to 8% annual adjusted diluted EPS growth. SRE's balance sheet is robust. Shares are also undervalued enough that they could generate nearly 30% cumulative total returns in the next two and a half years. This mix of healthy fundamentals and a discounted valuation is enough to justify a buy rating in my view.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","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":"4.26.3","shortVersion":"4.26.3","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/2451987289"}