Dividend Investor Portfolio #31: Energizing Returns
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Dear Investor,
Welcome to the 31st edition of TipRanks’ Dividend Investor Portfolio & Newsletter.
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Market-Moving News: October 21, 2024
Major stock indexes rose, with the S&P 500 (SPX) climbing for the sixth week in a row to a new record with gains of 0.85%. The Dow Jones Industrial Average (DJIA) rose by 0.96% on the week, also climbing to an all-time high. Meanwhile, the Nasdaq Composite (NDAQ) and the Nasdaq-100 (NDX) added 0.80% and 0.26%, respectively.
Last week, solid retail sales numbers and lower weekly jobless claims provided a boost to investor sentiment. In response to continued economic resilience, markets have lowered their expectations regarding both the number and size of rate cuts this year. However, the Fed apparently has much more room for monetary easing, since the prolonged softness in manufacturing, coupled with lower commodity prices, continues to keep a lid on inflation.
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This Week’s Quality Dividend Stock Idea
Sempra (SRE) is an energy infrastructure company, which engages in the sale, distribution, storage, and transportation of electricity and natural gas. The company serves approximately 40 million consumers across North America with a strong focus on the most attractive markets including California, Texas, Mexico, and the LNG export market.
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Energizing Track Record
Sempra Energy, now known as Sempra, was formed in 1998 through the merger of Pacific Enterprises and Enova Corporation, the parent companies of Southern California Gas Company and San Diego Gas & Electric, respectively. This merger created one of the largest energy services holding companies in the United States.
Immediately following its formation, Sempra began to grow its assets and expand its geographical reach through acquisitions and investments. Thus, its 1999 acquisition of two utility companies in Chile and Peru facilitated its entry into the fast-growing Latin American energy market. Although in later years Sempra divested these assets as it refocused on its core markets, they were important steppingstones for the firm.
Another significant acquisition was Sempra’s 2018 purchase of Energy Future Holdings, which included an 80% ownership interest in Oncor Electric Delivery Company, Texas’s largest utility delivery company. This move expanded Sempra’s presence in the Texas energy market while providing a platform for future growth in the U.S. Gulf Coast region.
Today, with $88 billion in total assets, a market capitalization of $54.4 billion, and annual revenues of nearly $17 billion, Sempra is one of the largest utility holding companies in the U.S., ranking #246 on the Fortune 500. It is also the utility holding company with the largest U.S. customer base.
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Diversified Business Model
Sempra operates through three segments: Sempra California, Sempra Texas Utilities, and Sempra Infrastructure, generating revenue through its operations in energy infrastructure, utilities, and renewables.
The Sempra California segment, which owns and operates a natural gas distribution, transmission, and storage system, provides electric and natural gas services to about 25 million Southern and Central California customers through its utilities, SDG&E, and SoCalGas. Sempra is a leader in North American energy network infrastructure with more than 7,700 km of natural gas transportation and distribution pipelines and a refined products terminal network under development and operation.
The Sempra Texas Utilities segment engages in electricity transmission and distribution through its regulated electric transmission and distribution utility subsidiary, Oncor Electric Delivery Company, which serves approximately 15 million Texans. Sempra earns revenue from regulated rates approved by government agencies.
Sempra’s Energy Infrastructure segment includes natural gas pipelines, storage facilities, and liquefied natural gas (LNG) export terminals. The company owns and operates infrastructure that supports the transportation and export of natural gas, including LNG facilities, which enable the export of natural gas to international markets. Within the segment, Sempra Infrastructure also operates U.S.-Mexico cross-border solar, wind, and battery storage projects.
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LNG – A Profitable Bridge Fuel
One of the most pivotal developments for the company was its 2005 decision to expand into the liquified natural gas (LNG) business as it began operations at its first LNG receipt terminal in Baja California, Mexico. In the 2010s, Sempra made several significant investments in LNG facilities in Louisiana (Cameron LNG) and Texas (Port Arthur LNG).
Today, Sempra’s LNG business encompasses the entire supply chain from natural gas sourcing to liquefaction, storage, and export. Sempra works with upstream producers to secure natural gas, which is then transported to its terminals, liquefied, and shipped to global buyers. The company leverages its access to natural gas pipelines and storage facilities in the U.S. and Mexico.
The bulk of Sempra’s LNG export business is based on long-term sales and purchase agreements (SPAs) with customers around the world. These agreements provide stable revenue streams, reducing exposure to market volatility. Customers include energy companies, utilities, and national energy agencies, particularly in Asia and Europe, which are the largest LNG importers.
Sempra is capitalizing on the growing global demand for cleaner energy sources, with LNG being seen as a transition fuel from coal and oil to renewables. Its connections with European buyers have allowed the company to benefit from the continent’s increased LNG demand, stemming from its clean-energy ambitions as well as geopolitical tensions and the need to diversify energy supplies away from Russian sources.
As global demand for LNG is slated to accelerate, Sempra is actively working on expanding its existing LNG infrastructure and adding capacity. These expansion efforts are a part of its long-term growth strategy to become a leading player in the global energy transition. Sempra has formed strategic partnerships with global energy companies like Mitsui & Co., TotalEnergies, and Saudi Aramco to jointly develop and finance LNG projects.
As of October 2024, Sempra is the largest North American developer of LNG export infrastructure, with significant projects like Cameron LNG in Louisiana, Port Arthur LNG in Texas, and the Energía Costa Azul LNG terminal in Mexico. These facilities position Sempra as a key player in global LNG exports, catering to the increasing demand for cleaner energy sources in markets like Asia and Europe.
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Financials Support Expansion
Like many utility and infrastructure companies, Sempra carries significant debt due to its capital-intensive projects. However, its debt levels are manageable given the company’s strong cash flow and long-term contracts that provide stable revenues. Sempra’s balance sheet remains sound, with a balanced approach to debt financing and equity raising for its LNG and utility expansions.
The company maintains investment-grade credit ratings, reflecting its ability to manage debt while financing its large-scale projects. Its debt is rated “BBB+” at Fitch and S&P, and “Baa3” at Moody’s. According to Fitch, “Sempra’s credit profile is supported by stable cash flows from regulated utility businesses in California and Texas and by long-term contracted infrastructure investments in the U.S. and Mexico.”
Income from Sempra’s regulated utilities accounts for approximately 80%-90% of its EBITDA. However, the ongoing Port Arthur LNG project expansion is expected to enhance the company’s revenue diversification. By leveraging its diversified operations in regulated utilities, energy infrastructure, and renewable energy projects, Sempra is slated to continue generating a stable stream of revenue for years to come.
Sempra continues to experience solid revenue growth, driven by its investments in LNG infrastructure, utilities, and renewable energy, and accelerated by LNG export operations. In the past five years, the company’s revenue grew at a CAGR of over 7%, while its EPS increased at a CAGR of 8%, consistent with the company’s long-term guidance.
While Sempra’s financial efficiency, measured by its key return ratios, is mostly in line with the average for comparable peers in the industry, many of its financial margins stand out thanks to its diversified energy infrastructure. Thus, Sempra’s gross and operating margins are relatively strong compared to its peers in the industry, while its net profit margin is significantly higher than average.
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Commitment to Shareholder Value
Robust financial performance supports Sempra’s dividend policy, which focuses on providing stable and growing returns to shareholders, making it a key component of the company’s appeal to long-term investors.
The company’s current dividend yield of 2.92% is in line with the average for the Utilities sector; however, its payout ratio of 52% is far below the sector’s average, where many companies carry ratios above 100%. The moderate payout ratio suggests a more conservative approach, allowing the company to retain a larger portion of its profits for reinvestment and debt management. Sempra’s strategy is to balance shareholder returns with the need for significant capital expenditure, especially given its heavy investments in infrastructure projects such as LNG terminals.
Sempra has never missed a dividend payment since the company’s formation, demonstrating resilience through economic cycles. Moreover, the company has consistently raised its dividends every year over the past 13 years. In the past five years, SRE’s payout has risen at a CAGR of 5.5% and is expected to continue increasing at a ~5% annual rate for the next several years. As the company’s heavyweight investments mature, they are expected to drive earnings and cash flow growth, which would in turn support faster dividend increases in the future.
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Total Return in Focus
In addition to dividends, SRE compensates its shareholders through opportunistic buybacks, which at times can be considered aggressive. The company’s share repurchase authorization, approved in 2020 with no expiry date, permits the company to perform buybacks to the extent of $2 billion.
During 2023, Sempra repurchased ~$33 million worth of common stock, after spending $478 million on buybacks in 2022. The company bought back $30 million of its stock in the first quarter of 2024, with further buybacks put on hold as the SRE share price appreciated significantly through the past two quarters.
Despite a strong advance over the past six months, SRE shares rose by just ~25% in the past year, underperforming the Utility sector’s ETFs. The underperformance was likely the result of several short-term headwinds, which included delays in obtaining non-FTA export permits for LNG projects and pending regulatory decisions in California.
Most of the export permits have already been obtained, with only the second phase of the Port Arthur LNG project awaiting a DOE permit. Sempra’s California utility arm is still awaiting resolution on its request for rate increases, but the delay should not be of significant concern given SRE’s track record of successfully navigating regulatory processes. Furthermore, the supportive regulatory environment in Texas provides a strong counterweight to California’s uncertainty, providing a stable foundation for growth.
The modest increase in SRE share price over the past year has rendered it more attractively valued than much of the energy sector, with the company’s valuations falling by ~5% below the average for Utilities. Sempra’s stock also comes at the bottom of the price scale for comparable peers in the industry, leaving more room for additional appreciation.
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Investing Takeaway
Sempra is one of the largest utility holding companies in the U.S., wielding a diversified portfolio of assets across traditional utilities, power generation, and LNG. This diversity positions the company well in the evolving energy markets and allows it to capitalize on various growth opportunities while mitigating risks associated with any single market segment. Sempra’s strong presence in key growth markets like Texas provides exposure to areas with robust economic development and increasing energy demand, particularly driven by data center proliferation. In addition, the LNG development projects represent significant growth opportunities, with robust cash flow from these developments expected to support Sempra’s overall growth strategy. SRE’s strong current market position and optimistic prospects support the outlook for continued dividend growth for years to come, positioning it as an attractive opportunity for long-term income investors.
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Dividend Investor Portfolio
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Portfolio News
¤ The Philip Morris (PM) will release its Q3 2024 results on October 22nd. Analysts foresee a ~9% year-over-year increase in EPS. In other company news, three global tobacco companies including PM have reached a tentative settlement with Canada over the long-running litigation, closing the chapter on a year-old court battle.
¤ BlackRock (BLK) said that its Bitcoin ETF, the iShares Bitcoin Trust, attracted over $1 billion in inflows last week as investors explored alternative assets to prepare for the coming interest-rate reductions.
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Recent Trades
None at the moment, although we are constantly evaluating stocks for a possible addition to the portfolio. Stay tuned.
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Portfolio Attributes
Dividend Portfolio Yield |
Expected Dividend Growth | Expected Annual Income |
3.94% | +9.55% | $4,606.96 |
Yield-on-Cost Adjusted, Weighted |
Average Analyst 12-Month Growth Outlook | 10K Per Stock at the Time of Purchase |
Current Portfolio
Name | EX-Dividend Date | Payment Date | Yield on Cost | Annual DPS |
Automatic Data Processing (ADP) | Dec 06, 2024 | Jan 01, 2025 | 2.24% | $5.60 |
Allianz SE ADR (ALIZY) | May 09, 2025 | May 28, 2025 | 5.67% | $1.49 |
Amgen (AMGN) | Nov 15, 2024 | Dec 06, 2024 | 3.09% | $9.00 |
BlackRock (BLK) | Dec 08, 2024 | Dec 23, 2024 | 2.56% | $20.40 |
Edison International (EIX) | Sep 27, 2024 | Oct 31, 2024 | 4.82% | $3.12 |
EOG Resources (EOG) | Oct 17, 2024 | Oct 31, 2024 | 3.95% | $3.64 |
JPMorgan Chase (JPM) | Oct 05, 2024 | Oct 31, 2024 | 2.86% | $5.00 |
Kroger (KR) | Nov 15, 2024 | Dec 01, 2024 | 2.82% | $1.28 |
LyondellBasell (LYB) | Nov 24, 2024 | Dec 04, 2024 | 5.27% | $5.36 |
Philip Morris (PM) | Dec 20, 2024 | Jan 10, 2025 | 6.06% | $5.40 |
Qualcomm (QCOM) | Nov 29, 2024 | Dec 13, 2024 | 2.25% | $3.40 |
VICI Properties (VICI) | Dec 20, 2024 | Jan 04, 2025 | 5.19% | $1.72 |
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Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.