Step 1: Description
Delta Natural Gas Company, Inc. distributes or transports natural gas in central and southeastern Kentucky.
After freezing its dividends from 2002 to 2004, DGAS became a dividend contender with 10 years of continuous dividend increase. Today I will discuss whether DGAS is at fair value and if its dividend is safe.
Step 2: FUNDAMENTALS
DGAS is a gas utility company. Normally I would like a company that increases its revenue each year; but, DGAS’ revenue is driven by consumer demand in the Kentucky area. No demand=no revenue.
Operating, Pretax, and Profit Margins
Revenue can only tell you so much. A company can make billions but it means nothing if it cannot pay itself. DGAS operating margin peaked in 2012 and fell back down to 16% for the past two previous years. This is a bit disheartening but 16% operating margin is nothing to laugh about. Its pretax margin and profit margin actually increased.
EPS & Dividend
I would normally like EPS to consistently increase but DGAS is a gas utility company. If there is no demand there is no earning. It should be noted that DGAS did a 2:1 split in 2012 so the drop in EPS is understandable.
DGAS EPS dividend payout ratio is relatively high ranging from 60% to 80%. Normally I would like a payout ratio of less than 60% but utility companies normally have less pricing powers than say JNJ.
Step 3: Can DGAS maintain its dividend?
EPS Dividend Payout Ratio means nothing if the company’s net income has been declining. You can’t pay what you don’t have…unless you borrow massive amount of debt. After a dip in 2012, DGAS net income has been steadily rising.
Asset to Debt Ratio
Some people like to look at Debt to Asset but I like to see it in reverse. What I want to see is a steady increase of assets. DGAS’0 assets have been rising consistently since 2012.
DGAS net cash flow declined from 2011-2012 and then dipped in 2013. From my research, 2013 total cash flow from operating activities was relatively the same from 2012 (13,556) but it increased its net borrowing (1500) from 2012 (59). I’m not too concerned about DGAS net cash flow since it looks like a one-time borrowing to pay off its liabilities; 2013 liabilities (3,716) vs 2014 liabilities (115).
I should note that DGAS as a peculiar cash flow. It makes a majority of its money from January to March; then slows down significantly from April to September; and ramp back up from October to December. But this is Kentucky and people only buy gas when it’s cold; not the middle of spring to early fall. DGAS also withhold borrowing until the last Quarter with the last two years borrowing 1.5 million in the 4th Quarter.
I should also note that in 2014, DGAS actually paid more in dividends than it received in net income from April through September. That is a bit for concern. DGAS mainly relies upon January to March to pay for its dividends. If DGAS has a bad first Quarter…it will probably have to borrow to pay its dividends.
Step 4: Is DGAS fairly valued?
DGAS currently has a P/E of 18.9. Looking at its competitors, ATO has a P/E of 17.7 and DUK has a P/E of 22.58. The gas utility sector has an average PE of 25. It should be noted that this sector average tend to be skewed all over the place. Some have 0 P/E while others have 600x P/E.
Conclusion: DGAS offers a unique place in the gas utilities sector. DGAS’ EPS and revenue seems to be on a cyclical trend hitting its high mark in 2008, crashing in 2009, and slowly building back up to its former highs in 2014. DGAS net income and profit-to-debt ratio have been steadily increasing but its payout ratio ranges anywhere from 60-80%. I am not sure if DGAS can keep up its abilities to grow fast enough to pay off its dividends. DGAS cash flow dipped in 2013 to pay off its liabilities but it has nicely recovered in 2014.
Based on my novice analysis, DGAS seems to be fully valued at $20/share. DGAS is a reliable dividend company as long as it has a good first quarter. If it doesn’t, expect heavy borrowing or dividend freeze. If Kentucky has many years of warm weather; expect a dividend cut.
In conclusion, DGAS is a relatively fair value company that offers a reliable dividend stream as long as Kentucky suffers from winter. I am not sure of its growth ability and have concern for its low margin of error.
*I do not own nor plan to own DGAS. I am not a financial advisor and you should not buy, sell, or hold based on this article alone. Always do proper research before buying, selling, or holding.
*Note: I am refining my stock analyzing skill by writing these articles. Any comments or suggestion is greatly appreciated. I will start posting lesser known stock analysis on my blog on a biweekly or triweekly basis. DGAS is so unknown that even Seeking Alpha has no in-depth article on it.