Endangered Dividends

So far in 2024, some two-dozen Utility Report Card coverage universe companies have raised dividends. And as this month’s comments indicate, that number could well treble over the next month, as more release Q4 numbers and update guidance. In contrast just one company, Orsted A/S (Denmark: ORSTED, OTC: DNNGY), has announced a dividend cut so far this year. The company wasn’t on the Endangered Dividends List. But neither was the move a real surprise and it was clearly strategic, demonstrated by the stock’s stable performance since last week’s announcement.

Six companies in the Utility Report Card coverage universe cut dividends in 2023. That’s been about the average count for most years since the mid-1980s, when I began tracking utilities and essential services stocks. But having so few last year was quite a demonstration of sector resilience.

UK electric utility SSE Plc (London: SSE, OTC: SSEZY) has “rebased” its twice-annual dividend to a new rate of 60 pence, starting with the March 2024 payment. That’s roughly -38 percent less than the previous annualized rate of 96.7 pence. As noted in my Utility Report Card comments, management stuck to its previous full-year FY2024 (end March 31) earnings guidance range, with a mid-point of GBP1.50 per share. That was despite what appeared to be disappointing results for the first half (end September 30), as adjusted EPS sank by roughly -11 percent.

There were zero dividend cuts in the Utility Report Card coverage universe last month. Nor were there any negative Q3 surprises to push another company onto the Endangered Dividends List.

Dominion Energy (NYSE: D) is off this list this month. Management provided details during its Q3 earnings call that strongly back the integrity of the current dividend. The stock is a buy up to 65 and is my Conservative Focus.

Normally, when a stock drops nearly 60 percent in just three weeks to yield more than 15 percent, you can bet a dividend cut is on the way. These, however, are no ordinary times in utility world. And a lower payout is far from a foregone conclusion for NextEra Energy Partners (NYSE: NEP). In late September, parent NextEra Energy (NYSE: NEE) cancelled a planned asset sale or “drop down” to Partners, citing tough capital market conditions that didn’t make sense to ignore. To make up for the lost proceeds, it instead announced the $923.4 million sale of its non-core Florida natural gas utility unit to Chesapeake Utilities (NYSE: CPK). And to compensate for the lost revenue to Partners, it cut the affiliate’s projected dividend growth rate to 6 percent from the previous 12 percent.

Hawaiian Electric Industries (NYSE: HE) suspended its dividend last month, saving roughly $158 million if continued over the next year. That’s a key piece of the utility’s defense against a wave of lawsuits resulting from Maui’s devastating wildfire, which wiped out the town of Lahaina and killed upwards of 100 people. Management has also drawn down most of the company’s $375 million in credit lines. And it’s considering restructuring moves including spinning out its American Savings Bank unit.

When a company cuts its dividend, its share price usually craters. The exception is if the reduction is part of a larger strategic move that makes sense. That’s the case for Aggressive Holding MDU Resources (NYSE: MDU), which reduced its quarterly dividend for payment in October by -43.8 percent to 12.5 cents per share.

Thus far in 2023, seven Utility Report Card companies have announced lower dividends than they paid in 2022. None, however, have done so since March. And 97 have raised payouts at least once, with three-dozen more ready to follow their lead.

First the good news: No companies in our Utility Report Card coverage universe announced dividends cuts last month. The bad news is none escaped the Endangered Dividends List. And in fact, the situation for several worsened, raising odds of cuts. That includes especially the three communications stocks: Telephone and Data Systems (NYSE: TDS), Uniti Group (NSDQ: UNIT) and Vodafone Group (London: VOD, NYSE: VOD).

There were no additional dividend cuts in the Utility Report Card coverage universe this month. And two companies earned an exit from the Endangered Dividends List, thanks to better than expected Q1 results and guidance. NuStar Energy (NYSE: NS) is still challenged by heavy debt taken on in the previous decade. And despite minimal maturities through 2024, management will have to devote the energy midstream company’s spare cash to paring down its $4.6 billion of borrowings. That’s almost three times the stock’s current market capitalization and includes nearly $2.1 billion with variable rates.