MDU is more than a yield

Recent Price $28
Dividend $0.85
Yield 3.1%
P/E Ratio 15
Shares (millions) 200.5
Long-Term Debt as % of Capital 41%
52-Week Price Range $32.22 - $15.00

 

Investors often buy utilities for their dividend yields without paying much attention to the underlying business. By that view, MDU Resources Group ($28; MDU) hardly stands out; its 3.1% dividend yield is slightly below the average of 3.5% for S&P 1500 Index utilities.

But MDU is not a typical utility stock. Although MDU operates regulated electric and natural-gas utilities, the company relies on construction businesses for about three-fourths of revenue and two-thirds of operating profit. Within Quadrix®, MDU also sets itself apart as one of just two stocks in the sector exceeding 80 for the Overall score. MDU is a Long-Term Buy.

A hybrid utility stock

Construction businesses have represented a significant portion of MDU’s operations for decades, combining for 41% of revenue in 2000 and 54% in 2010. Utilities have remained a steady presence, accounting for 12% to 29% of annual sales over the past 20 years. And in recent years, MDU has aggressively shrunk its pipeline business and pulled out of exploration and production altogether.

Today, MDU’s operations break down as follows: construction materials (39% of sales for the 12 months ended September, 40% of operating income), construction services (37%, 26%), natural-gas utility (15%, 13%), electric utility (6%, 12%), regulated and nonregulated pipeline (2%, 9%).

Not surprisingly, MDU’s recent operating results don’t fit the profile of a typical utility stock. For the 12 months ended September, MDU grew earnings per share 16% and sales 7%, while the average utility stock in the S&P 1500 Index reported 5% higher profits on a sales decline of 3%. Construction services is driving growth for revenue (up 17%), while construction materials (up 26%) is boosting operating profits.

Investors need not pay up for that growth, even after MDU shares have produced a six-month total return of 22%. At 14 times trailing earnings, MDU’s stock trades 27% below its sector average.

Conclusion

In December, MDU raised its 2020 outlook for earnings per share to a range of $1.92 to $2.02, which implies 14% to 20% growth. Prior guidance called for $1.80 to $1.90. Management noted strong demand in November and December, along with warm weather in the North that extended the construction season. The per-share-profit consensus now stands at $1.93, up from $1.86 at the time of the announcement but still leaving plenty of room for upside. MDU’s new full-year outlook implies December quarter earnings per share of $0.53 to $0.63, good for growth of 13% to 34%.

With its construction units combining for a backlog of $1.80 billion (42% of 12-month sales), MDU expects momentum from 2020 to carry into the new year. Analyst estimates for 2021 have steadily crept higher over the past 90 days, though the current consensus — flat earnings per share and 3% sales growth — still seems conservative given MDU’s recent operating momentum.

MDU Resources Group Inc., 200 West Century Ave. P.O. Box 5650, Bismarck, ND 58506-5650 (701) 530-1000; www. mdu.com.

 

Quarter Per-Share Earnings* Sales Change Quarterly Price Range P/E Ratio
Range
Sep '20 $0.76 vs. $0.68 2% $24.69 - $20.32 14 - 11
Jun '20 0.50 vs. 0.32 5% 24.96 - 18.50 16 - 12
Mar '20 0.13 vs. 0.21 10% 32.22 - 15.00 19 - 9
Dec '19 0.47 vs. 0.39 14% 29.83 - 27.19 19 - 17

 

Year
(Dec.)
Sales
(Bil.)
Per-Share Earnings* Per-Share
Dividend
52-Week Price Range P/E Ratio
Range
2019 $5.3 $1.69 $0.82 $29.83 - $23.36 18 - 14
2018 4.5 1.38 0.80 29.62 - 22.73 21 - 16
2017 4.4 1.25 0.77 29.74 - 25.14 24 - 20
2016 4.1 1.17 0.76 29.92 - 15.58 26 - 13

 

Quadrix Scores
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Perform-
ance
Reversion
93 69 85 79 64 91 49 51

 

* Earnings exclude special items.
NA Not Available.
Quadrix® scores are percentile ranks, with 100 the best.
e Dividend and yield estimated.