Black Hills Corporation (NYSE:BKH) is a growth utility that keeps on truckin’ during good times and bad. Back in 2016, this management earned a black eye from Mr. Market when it came to market with a large offering of common stock well below the market price of the stock at the time to make a large acquisition. Since that time, the acquisition appears to have worked out reasonably well. However, management is keenly aware that no utility investor wants to see their investment drop by that amount even for a short period of time. There just is not a good enough reason for that in the eyes of many income investors.

Therefore management is unlikely to repeat that experience anytime in the near future. Instead, management is likely to continue its history of growing by acquisitions of smaller competitors in reasonably business friendly states. That should continue to offer investors both growth and income in the future. This well-run company generally trades at a premium to many in the industry.

Nevertheless, the recent events surrounding the coronavirus demand destruction now offer the chance to participate in the recovery potential of this utility and then hang on for an above-average return of both income and dividends in the future (if that suits a particular investor’s goals).

For those with long memories, this company has (on a highly irregular basis) also spun off a company or two and exited as well as entered the upstream, mostly natural gas, business several times with varying degrees of success. While that type of diversification may make sense, the main emphasis here is on utility operations. The tendency of this management over time to think outside the box is both a plus (in the form of higher rewards) and also involves more risks.

Stock Price Action

Like many stocks, Mr. Market dumped this one along with the rest of the market (not named for example Tesla (TSLA)). Yet utilities rarely suffer an earnings variance due to the economy. So the stock price downdraft here is somewhat fear based where the fears got out of hand.

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Source: Seeking Alpha Website September 24, 2020

As can be seen here, the market clearly overreacted. Management reaffirmed guidance for the fiscal year with the second-quarter earnings announcement. The earnings should come in somewhere around $3.50 per share for the current fiscal year. The natural gas business adds a little more volatility (excitement) to earnings than a purely natural gas utility. But still the visibility of the overall business is outstanding.

Source: Black Hills Corporation Website August 22, 2020

Notice that the dividend just increased about 7% in the last fiscal year. But far more importantly, this dividend represents about half of earnings. That provides quite a cushion for unexpected events in the future. Management retains a fair amount of cash to actually grow the business. The lack of preferred stock outstanding makes the whole leverage as well as dividend predictability far easier. So many utility managements “live on the financial edge” knowing that their business is predictable. But that tends to limit the growth prospects per share.

Black Hills is also one of very few companies to ever have a stock split (or two as shown here) in its history. Now the past is no guarantee of the future. But Seeking Alpha shows the appreciation from my first article of 15% and a total return of 34% over a roughly five-year period. Given how much the market has recently dropped and the current situation, that is a very good record for any utility. Before the coronavirus challenges, the return was considerably more over five years.

The Business

The main business would be the servicing of both electrical and natural gas needs of customers in the Midwest.

Source: Black Hills Corporation Second-Quarter 2020 Earnings Conference Call Slide Presentations

As shown above, this company covers a lot of rural and lower population areas of the Midwest. These areas tend to not be affected by economic swings as much as the rest of the country. Even given the exposure of Wyoming and Colorado (for example) to energy, its volatility does not appear to affect the earnings of this utility that much. The benefits of geographic diversification with that substantial rural exposure are evident.

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Source: Black Hills Corporation Second-Quarter 2020 Earnings Conference Call Slide Presentations

Notice that this company has some exposure to non-regulated business. That usually needs to be monitored by investors because this company has the habit of turning that small part of the company into some “extra” returns from time to time. But it is also a risk factor in that there can be losses (and there have been some of those in the past too).

Source: Black Hills Corporation Second-Quarter 2020 Earnings Conference Call Slide Presentations

As shown above, generally the shareholder returns are above the return that a shareholder could obtain long term on average. Yet the overall low risk of a utility stock makes the risk-adjusted return worth considering.

Anytime an investor can achieve more than the general, long-term return of 8% with below-average risk, then that company could well be a core position consideration.

Right now, this stock has been pummeled by the market even though earnings appear to remain largely on track for the current fiscal year. Furthermore, this management retains a fair amount of cash to grow the business and make acquisitions. The current environment should allow some better-than-average deals to be accomplished from distressed sellers. Therefore the patient investor should do well from the current price.

This stock should at least appreciate 50% to return to its previous price range. But the earnings will have progressed a year or two since that price range was achieved. In addition, there will be a dividend increase or two until the stock price gets back to its normal trading range. Therefore the combined return for this stock is easily in the 12% to 15% range over the next five years. That type of return is very unusual for a utility stock.

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Source: Black Hills Corporation Second-Quarter 2020 Earnings Conference Call Slide Presentations

There is some exposure to the coal mining business and has been for a while. But the coal mined by this company has a ready user in the electrical business. Management has been converting older coal-fired plants to natural gas plants. Given the history of this management, it will most likely attempt to sell the coal mining segment in the future when it appears that the number of coal-fired, electrical-generating plants appears to dwindle sufficiently. However, that appears to be a far-in-the-future task.

I analyze oil and gas companies and related companies like Black Hills Corporation in my service, Oil & Gas Value Research, where I look for undervalued names in the oil and gas space. I break down everything you need to know about these companies – the balance sheet, competitive position and development prospects. This article is an example of what I do. But for Oil & Gas Value Research members, they get it first and they get analysis on some companies that is not published on the free site. Interested? Sign up here for a free two-week trial.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BKH over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: I am not an investment advisor and this article is not meant to be a recommendation of the purchase or sale of stock. Investors are advised to review all company documents, and press releases to see if the company fits their own investment qualifications.