Home Training Blue chip stocks in the spotlight: Atmos Energy

Blue chip stocks in the spotlight: Atmos Energy


Posted on August 17, 2022 by Felix Martinez

There is no exact definition of blue chip stocks. We define this as a stock whose dividend has increased for at least ten consecutive years. We believe that a track record of annual dividend increases spanning at least a decade demonstrates the company’s ability to deliver consistent growth and dividend growth even in recessionary conditions.

As a result, we believe blue chip stocks are some of the safest dividend stocks investors can buy.

With all of this in mind, we’ve created a list of 350+ blue chip promotionswhich you can download by clicking below:

In addition to the Excel spreadsheet above, we’ll take an individual look at the top 50 blue chip stocks ranked today using expected total return from Sure Analysis Research Database.

This article will analyze Atmos Energy (ATO) as part of our 2022 Blue Chip Stock Spotlight series.

Business overview

Atmos Energy traces its roots back to 1906, when it was established in Texas. It has since grown organically and through mergers to a market capitalization of $16.5 billion.

The company distributes and stores natural gas in eight states, serves more than 3 million customers and is expected to generate about $3.7 billion in revenue this year. Atmos Energy operates its own pipeline and storage assets, including one of the largest intrastate pipeline systems in Texas. Atmos has a 38-year history of increasing dividends, making it one of the rare companies among dividend stocks.

Atmos reported third-quarter earnings on August 3, 2022, with better-than-expected results on both the top and bottom lines. Earnings per share amounted to $0.92, which was seven cents above estimates. Total investment income rose 34.8% to $816.4 million, beating expectations by $128.67 million.

Consolidated operating income increased by $21.2 million to $154.6 million in the third quarter from $133.4 million in the third quarter of 2021.

Operating income from distributions fell to $66.1 million for the quarter, compared to $68.1 million in the third quarter of 2021. Key operating drivers for this segment include a $30.5 million net increase in rates, a $2.6 million increase from net customer growth, a $3.3 million increase in consumption, net of weather normalization adjustments (WNA) and a $1.8 million decrease in other operating and maintenance expenses primarily due to lower bad debt expenses in the current year quarter, partially offset by a $13.7 million increase in depreciation and amortization and property tax expense and an increase in service costs systems for $5.0 million.

Operating income from pipelines and storage increased from $23.3 million to $88.5 million, compared to $65.3 million for the same period in 2021. The primary drivers for this segment were a rate increase of $21.0 million due to approved GRIP applications in 20211 and 2022. Also a $6.1 million reduction in system maintenance costs.

Source: Presentation for the investor

Growth prospects

Utility revenue growth typically mimics GDP growth. However, we expect Atmos Energy to continue to outperform this trend due to its focus on capital investment in regulated operations, a constructive regulatory environment in Texas and population growth.

As a result, the company will benefit from steady base rate growth, which will lead to annual earnings per share growth in line with management’s guidance of 6-8%. For example, last year the company was allowed to raise rates.

The growth drivers for Atmos Energy are new customers, rate increases and aggressive capital spending. One of the benefits of working in a regulated industry is that utilities are allowed to raise rates on a regular basis, virtually ensuring a sustainable level of growth.

The company presented a forecast for 2022. The company expects to increase distribution and total net income for the year. They also expect earnings to rise from $5.12 per share in 2021 to $5.55 per share in 2022.

Source: Presentation for the investor

Competitive advantage and recession outcomes

Atmos Energy’s main competitive advantage is the high regulatory hurdles of the utility industry. Gas service is necessary and vital to society. As a result, the industry is heavily regulated, making it virtually impossible for a new competitor to enter the market. This gives great confidence to Atmos Energy and its annual earnings.

Another competitive advantage of the company is its stable business model and strong balance sheet, which provides an attractive cost of capital. This allows it to fund ramping up acquisitions and capital spending growth, helping to boost earnings per share.

Additionally, the utility business model is highly recession-proof. While many companies experienced significant declines in profits in 2008 and 2009, Atmos Energy’s earnings per share continued to grow. Earnings per share during the Great Recession are shown below:

  • Earnings per share in 2007 amounted to $1.91
  • Earnings per share in 2008 were $1.99 (up 4%)
  • Earnings per share in 2009 was $2.07 (up 4%)
  • Earnings per share in 2010 was $2.20 (up 6%)

The company continued to deliver healthy growth even during the worst of the economic downturn. This resilience has allowed Atmos Energy to continue to increase its dividend every year.

The company has a solid balance sheet. The company has a debt-to-equity ratio of 0.9 and a long-term debt-to-equity ratio of 33.4. In addition, the interest coverage ratio is 10.3, which is an excellent ratio, meaning that the company is covering its debt interest well. The company also has an AS&P credit rating. This is an investment grade rating.

Source: Presentation for the investor

Valuation and expected return

Atmos Energy is expected to earn $5.55 this year. Based on this, the stock is trading at a price-to-earnings ratio of 21.4. This is above our fair value estimate of 19 times. The current ratio also exceeds the company’s ten-year average earnings ratio of 19.6 times. However, this is below the five-year average earnings of 22.3 times.

Therefore, Atmos Energy shares appear to be overvalued. If the stock’s valuation returns to its fair value estimate over the next five years, the corresponding multiple reduction would reduce annual earnings by 1.9%. This can be a bit of a drag on future profits.

Stocks can still provide positive returns to shareholders through earnings and dividend growth. We expect the company’s earnings to grow by 6% per year over the next five years.

In addition, the stock’s current dividend yield is 2.3%. Atmos Energy last increased its dividend by 8.8% in November 2021. This marked the 38th year of dividend growth for Atmos Energy. We expect the company to increase its dividend this November at a high single-digit rate.

Overall, if we add it all together, we can expect the company to have a 6.4% annualized rate of return over the next five years.

Final thoughts

Atmos has strong fundamentals and a long track record of strong performance, but the valuation has risen recently. We forecast a total annual return of 6.4%, comprised of a current yield of 2.3%, EPS growth of 6% and a small potential valuation bump. Therefore, the stock receives a hold rating.

The blue chip list isn’t the only way to quickly check stocks that pay growing dividends on a regular basis.

Thank you for reading this article. Please send any feedback, corrections or questions to support@suredividend.com.

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