Two Dividend Payers In Low-Risk Buy Zones

It’s been a solid month for the market, with the S&P 500 (SPY) up 6% in January and another 1% to start February. However, the real winners have been growth stocks, with the Russell 1000 Growth Index Fund (IWF) up 10% year-to-date.

This broad-based rally has made it more difficult to find names trading at deep discounts to fair value, but there are still a few names that continue to look attractive, especially if one is looking to battle-harden and diversify their portfolio with high yields.

Given the violent pullback in natural gas prices and some disappointing company-specific news this week, TC Energy (TRP) and National Fuel Gas Company (NFG) have found themselves sitting near 52-week lows, placing them in a relatively low-risk buy zone to start new positions. Let’s take a closer look below:

TC Energy (TRP)

TC Energy is one of the largest North American energy companies. It is best known as the owner of the Keystone XL Pipeline (~2,900 miles) that transports Canadian/US crude oil supplies across North America and the ANR Pipeline, one of the largest interstate natural gas pipeline systems (~9,200 miles) in the US.

The company was founded in 1951 and continues to have one of the best dividend track records among its peers, consistently paying and growing its dividend over the past 22 years, from $0.80 in FY2022 to $3.60 in FY2022.

Unfortunately, while it is a steady dividend and earnings grower that has continued to diversify with a focus on adding renewables over the past few years, it has had a rough past year from an inflationary standpoint.

This is evidenced by the company having to raise the cost estimate for its Coastal GasLink Project in Western Canada to ~$11.0 billion, impacting its FY2023 capital spending outlook, which has come after already reporting a doubling of the initial cost estimate to ~$7.0+ billion six months ago.

The continued cost increases can be attributed to construction delays due to COVID-19 disruptions and protests, combined with higher costs for materials.

Adding insult to injury, the company issued a force majeure for its Keystone Oil Pipeline in November after a series of weather-related impacts, and its pipeline was shut in early December due to an oil leak into a creek in Kansas.

Fortunately, the company has since received approval to reopen the Keystone Pipeline after repairs, but the continued issues have weighed on sentiment for the stock, with the most recent capex blowout contributing to a more than 5% decline this week.

The poor share price performance is partially related to the fact that this capex increase could result in asset sales for the company to de-leverage, which would be negative and drag on earnings over the short run while new projects are built.

That said, the time to buy Dividend Aristocrats is when they’re having “kitchen sink” years, and everything is getting thrown at them because it typically leaves them trading at a deep discount to fair value.

In TC Energy’s case, the stock now trades at ~12.2x FY2024 earnings estimates at a share price of $41.00 and is paying a nearly 6.70% forward dividend yield, one of the highest market-wide and with a plan to grow dividends by at least 3% each year.

So, for investors looking to diversify their portfolio with a hated name that hasn’t participated in this rally that can provide steady income, I see TRP in a low-risk buy zone below $41.00.

National Fuel Gas Company (NFG)

National Fuel Gas Company may not have had the company-specific issues that TC Energy has, but it’s also off to a rough start to the year, down nearly 10% year-to-date and hovering near 52-week lows. The poor performance can be attributed to the recent softness in the price of natural gas.

Still, National Fuel Gas Company is a diversified mid-cap and integrated natural gas company with EBITDA coming from upstream (exploration & production), midstream (gathering pipeline & storage), and downstream (utility), making it less susceptible to pullbacks in commodity prices than pure producers.

The company’s diversified asset base allows it to adjust quickly to changing commodity price environments (which we’re clearly witnessing currently) and also provides higher returns on investment.

Plus, it also boasts a massive land position of 1.2 million net acres in the Marcellus and Utica shales.

In addition, the planned optimization of the Interstate Pipeline provides future growth options. One is the opportunity to transport volumes out of the basin and optimize throughput through expansion projects.

However, while National Fuel Gas Company has future growth and optimization opportunities to boost free cash flow and an enviable land position, it also stands head and shoulders above its peers for its incredible dividend track record.

This is evidenced by 52 years of consecutive dividend increases (plus 120 years of consecutive payments), translating to 900% growth in its annual dividend since the 1970s ($1.90 vs. $0.19).

The problem has been that the stock wasn’t cheap in 2022, making it difficult to justify owning the name with a low yield and the stock close to fully valued above $75.00 per share.

Fortunately, with the violent decline in the share price due to negative sentiment surrounding natural gas, NFG is now paying a much more attractive 3.3% yield at a share price of $57.20 vs. a barely 2.3% yield at its highs last June.

Meanwhile, it’s trading at a dirt-cheap valuation of ~8.7x FY2024 earnings estimates ($6.60), providing a nice combination of growth and value.

So, with the stock oversold short-term, I see this pullback below $57.50 as a buying opportunity.

While TRP and NFG may not be the most exciting ideas in a market where tech names are enjoying 10% plus rallies weekly, these are two steady and consistent dividend payers that are now on the sale rack and provide stability and guaranteed income to one’s portfolio.

So, for investors interested in diversification and smoothing out portfolio volatility, I believe both names should be kept at the top of one’s watchlist and see them both as attractive following their recent corrections.

Disclosure: I am long TRP

Taylor Dart Contributor

Disclaimer: This article is the opinion of the contributor themselves. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information in this writing.