Interested in utility stocks? Investors may want to stick to utility stocks like superglue on fingers because they offer high reliability and stability regardless of what's going on in the rest of the world. Consumers need utilities, and what's better than the combination of consistency and ongoing dividends? You may not be able to suppress a happy sigh as you watch the dividends come in.
You're likely interested in finding the companies that offer the best performers, but is Atmos Energy Corporation (NYSE: ATO), a regulated utility, one of those? Let's take a look at Atmos Energy's performance this year and in prior years, its history and the pros and cons that might help you decide whether to plunk it into your portfolio.
About Atmos Energy Corporation
Atmos Energy Corporation's fledgling moments began in 1906 in the Texas panhandle as a diversified energy corporation. It was called the Pioneer Corporation for many years. In 1981, the company was incorporated and became a distributor of natural gas.
The company, now headquartered in Dallas, became Energas in 1983 and became Atmos Energy Corporation in October 1988 and began trading on the stock market as ATO. Atmos Energy's acquisitions have caused it to expand further, primarily through the TXU Gas Company in October 2004 and is now one of the largest natural gas distributors in the country.
Atmos Energy Corporation deals in natural gas distribution, pipeline and storage in the United States, regulating natural gas distribution and related sales operations in eight states. It distributes natural gas to a wide variety of customers, including for residential, commercial and industrial use. It also owns over 71,000 miles of underground distribution and transmission mains, while another segment transports natural gas for third parties and manages through its storage reservoirs.
Pros and Cons of Atmos Energy Corporation
Let's take a closer look at the exact reasons why you might consider loading up on Atmos Energy Corporation.
Let's start with the overarching positives of Atmos Energy Corporation:
- Outperformance: Atmos has high returns and has outperformed its peers so far in 2022. Earnings per diluted share was $4.24 as of March 31, 2022 and $2.37 per diluted share for the second fiscal quarter. Consolidated net income was $574.2 million for the six months ended March 31, 2022 and $325 million for the second fiscal quarter. Capital expenditures totaled $1,190 million — about 87 percent of capital spending was related to system safety and reliability investments.
- High outlook and dividends: Earnings per diluted share for fiscal 2022 should be in the adjusted range of $5.50 to $5.60 with capital expenditures of $2.4 billion to $2.5 billion in fiscal 2022, an 8.8% increase over fiscal 2021.
- Quality infrastructure: As the nation's roads, bridges, water and natural gas systems deteriorate, Atmos is on top of it, replacing pipe nationwide, more so than its peers. The company has already invested $9 billion in pipe replacement and will continue to do so, directly impacting shareholders and other stakeholders, including clients.
- Solid dividend: With a 2.40% dividend yield, a long track record of dividends (38 years), $2.72 dividend and a dividend payout ratio of 50.56%, the company is spitting out a consistent dividend and has been for 38 years. Past history (while no guarantee of future performance) indicates that if you had invested $1,000 in April 2012, the stock would have gained over 200% in the same month of 2022. The company shares would have been worth close to $4,000.
On the other hand, you may want to consider these cons before you buy. It's easy to get a bit myopic about the stocks you're interested in because you have high hopes for each stock's future. Check out these downsides before you buy:
- Debt: For some investors, the company's debt to EBITDA ratio may not be tolerable. As of December 2021, the company had $7.92 billion worth of debt compared to last year's debt level of $5.12 billion. However, it has cash to offset that amount, of over $300 million. Risky debt and other liabilities can become a problem when companies cannot meet their debt obligations. If it needed to pay off its debt to its creditors immediately, it would likely affect shareholders. A result of investing in infrastructure has resulted in negative free cash flow. capital market as it cannot internally fund its growth projects and dividends.
- Limited growth opportunities: Since it's a regulated company, the company has to rely on pipeline and natural gas storage for more robust growth.
- Natural gas itself: What is the future of natural gas? Though natural gas has positioned itself as "better" than many other types of energy sources, renewable energy is still the name of the game. It may leave a divot in Atmos' future prospects. It's a worthy consideration if you're thinking of holding Atmos Energy for the long term.
Consider Atmos for Rewarding Dividend Returns
Utility stocks can help you battle a lot of market storms if you're looking for a way to add stability and balance into your portfolio. It may not be a sector that fellow investors may consider due to the "snoozeworthiness" of the utilities sector. Realistically, regulated utilities companies cannot overcome the excitement that big tech can portend for investors. However, there's a level of safety within regional monopolies that cannot be ignored. Atmos' long-time dividend (36 years), storage and pipeline options, number of shares outstanding, solid fundamentals, decent valuation and more shows growth and few risks.
If you're thinking about adding it to your portfolio, carefully consider whether you should diversify your holdings as well. It may be wise to add to a wide range of other dividend high flyers or add to a conglomerate of ETFs, bonds and other investment choices.