For much of my life I have viewed utilities as boring investments. But the closer I get to retirement, the more I realize the truth of the statement, “Boring is beautiful.”
My portfolio now includes several utility stocks. And recently I added another one: UGI Company (NYSE:UGI). Why did I buy UGI shares? Three main reasons top the list.
1. A resilient company
The last thing I want to invest in these days is a company that could go under because of a few bad moves. UGI is not such a company because its operations are very resilient.
UGI owns AmeriGas, the largest propane distributor in the US. 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 liquefied petroleum gas (LPG) distribution unit serving several European countries.
The company has been around for 142 years. It expects average long-term earnings per share growth of between 4% and 6%.
To be sure, AmeriGas’ earnings have been very volatile. Last year, Fitch lowered its outlook for the company from stable to negative.
However, UGI is committed to stabilizing AmeriGas by controlling costs and strengthening its balance sheet. These efforts appear to be paying off, given the company’s solid third-quarter 2024 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. The future dividend yield is an ultra-high 5.95%. The payout ratio is also at a reasonable level of 47.8%.
UGI has been paying dividends for 140 years in a row, and that’s not a typo. The utility first paid a dividend in 1884 and hasn’t missed a beat since. Few dividend stocks have such a reliable track record.
Over the past decade, UGI has increased its dividend at a compound annual growth rate of 6%. Granted, the company won’t give shareholders a dividend increase this year and doesn’t expect one in fiscal 2025 or 2026 as it focuses on strengthening its balance sheet. However, UGI plans to increase dividend payments again by approximately 4% per year in fiscal 2027 and beyond.
3. An attractive valuation
UGI’s stock price has been on a mostly downward trend over the past three years. The AmeriGas challenges were the main culprit behind this disappointing performance. However, there is a positive side effect of the stock’s decline: an attractive valuation.
Zacks Equity Research gives UGI a grade of “A” in Valuation, and the stock trades at just 8x forward earnings. That’s less than half of the average price-to-earnings ratio of 18.8 for the S&P500 utility sector.
I might consider UGI a value trap if I didn’t think the future looked brighter than the recent past, but that’s not the case as the company’s financials improve. It expects to be able to achieve reliable earnings growth in the future.
Plus one bonus
Some investors like to ‘bet on the jockey and not the horse’. My opinion is that if the horse is fast enough, it doesn’t matter much who the jockey is. That said, I want solid, competent management in charge of the companies I invest in.
It was therefore a nice bonus when UGI appointed Bob Flexon as its new CEO with effect from November 1, 2024. Flexon was CFO of UGI for about six months in 2011 and was CEO of energy company Dynegy from July 2011 to April 2018. He also served as CEO of engineering and construction contractor Foster Wheeler and as CFO and COO of NRG Energy.
I didn’t buy UGI stock because Flexon is taking the helm of the company, but he is an example of the kind of leadership I like to see. With Flexon as CEO, I expect UGI to provide the stability investors desire.
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Keith Speights holds positions in UGI. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Why I Just Bought This Ultra-High-Yield Dividend Stock was originally published by The Motley Fool
