MDU Resources Stock: Offers You Income And Value (NYSE:MDU)

It’s hard to go wrong with dividend aristocrats that have a strong track record of shareholder returns, especially when the underlying company is a utility that isn’t likely to go away any time soon. While these stocks aren’t going to help you strike it rich in the same manner that meme stocks can, they can also help to shield you from devastating losses that inevitably come with the party is over.

This brings me to MDU Resources (NYSE:MDU) which is a utility company that has rewarded shareholders well over the long-term. In this article, I highlight what makes MDU a solid choice for long-term income investors, so let’s get started.

Why MDU?

MDU Resources was founded nearly a century ago in 1924, and is based in North Dakota, operating as a diversified utility, pipeline, and construction services company. It provides electric service to Montana, North and South Dakota, and Wyoming. It also distributes natural gas to Idaho, Minnesota, Oregon, and Washington. Lastly, it operates pipelines for natural gas transportation and underground storage, and in the trailing 12 months, MDU generated $6.2 billion in total revenue.

MDU’s tried and true business model has delivered steady results. This is reflected by its smooth revenue trajectory over the past 10 years. As shown below, MDU has delivered 52% revenue growth over the past decade, with virtually no blips along the way.

MDU recently reported mixed bag second quarter results. This included all-time record revenues for its construction services business, which was up 30% YoY. This side of the business also delivered record earnings of $34.5 million, which is up 19% YoY from $28.9 million in the prior year period. Also encouraging, the construction materials business had record second quarter revenues that improved by 12% YoY, but it was impacted by cost and wage inflation, which drove earnings for this business down by 36.5% YoY.

Moreover, the pipeline business saw an earnings decline of $2.1 million YoY, and the electric and natural gas utility had a loss of $2.9 million in Q2, compared to earnings of $9.6 million in the prior year period. This was driven primarily by lower investment returns on nonqualified benefit plans.

In addition, late season blizzards and overall cooler temperatures impacted MDU’s service territory, resulting in less electricity use for cooling. I’m not too concerned as weather is difficult to predict, and the lower investment returns are due to equity and bond market volatility, especially considering that the S&P 500 (SPY) had its worst first half performance since 1970.

Looking forward, I see MDU’s recently announced spinoff of its Knife River construction materials unit as being a plus for shareholders, as this segment is subject to the most volatility due to the unpredictable nature of input costs, especially in the current environment. This also simplifies the remaining business, enabling management to double-down their focus on the core utility, pipeline, and related infrastructure services.

Moreover, the utility side of the business should see healthy growth stemming from an increasing customer base and rate increases, as noted during the conference call:

Our customer base grew 1.6% on a year-over-year basis, and we expect this growth to continue at a pace of 1% to 2% compounded annually over the next 5 years. We also expect rate base to grow 5% compounded annually over these next 5 years, driven primarily by investments in system infrastructure, upgrades and replacements to safely meet customer demand. This business continues to seek regulatory recovery for the investments associated with providing the safe and reliable electric and natural gas service to our growing customer base.

In May, our electric utility filed a request in North Dakota for a 12.3% electric rate increase and the Public Service Commission recently approved a 5.3% interim increase effective here in mid-July. The Public Service Commission has 7 months to render a final decision on the rate case. In Washington, the WTC is expected to make a decision by September 1 on our pending natural gas rate case that we have there.

Meanwhile, MDU carries a strong BBB+ rated balance sheet. It also pays a 3% dividend yield that’s well-covered by a 26.7% payout ratio, and is a dividend aristocrat with over 25 years of dividend increases. While its dividend growth has been slow over the past few years, I would expect for it to pick up pace as complexity risk is removed with the aforementioned spin-off.

At the current price of $29.20, MDU trades at a forward PE of just 14.5, sitting well below its normal PE of 19.2 over the past decade. Sell side analysts have a consensus Buy rating on the stock with an average price target of $33.50, translating to a potential one-year 18% total return including dividends.

Investor Takeaway

In summary, I believe that MDU Resources is offering a solid value proposition at the current price. It has a strong balance sheet, pays a well-covered dividend, and is in the midst of spinning off its most volatile business segment.

Analysts are expecting healthy growth from its utility business, driven by an increasing customer base and rate increases. I believe that these tailwinds will help MDU to grow its dividend at a healthy pace, making it an attractive addition to any income-focused portfolio.