2021 Week 2: MDU Resources Group (NYSE:MDU)

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This week’s (01/10/2021 – 01/16/2021) capital allocation will be used to establish a position in MDU Resources Group (NYSE: MDU).

MDU – Company Profile

MDU is a regulated energy delivery, transportation, and construction materials and services business. The company operates electric and natural gas utilities in MN, MT, ND, OR, SD, WA, and WY. Its pipelines business operates pipeline systems for natural gas in the Rocky Mountains and northern Great Plains regions. The construction business operates in 48 states. Official Site | Wikipedia

Dividend Streak29 years
Yield3.18%
Payout Ratio46%
P/E14.37
Minimal Entry Criteria Scorecard

Financials

MDU combines a stable and highly regulated utilities and pipelines business with a cyclical construction business. The utilities and pipelines business makes up 28% of net income, whereas, the construction business make up 70% of net income. The construction business has provided a boost to earnings in recent years as the sector has done well. However, it can become a major drag during recessions.

Over the last decade, MDU has been able to steadily grow revenue. Net income, on the other hand, has been more volatile. One big source of volatility was the discontinuing of operations and sale of assets of its oil and gas exploration business, Fidelity, during 2015 and 2016. MDU recorded expenses for discontinued operations of $772 million in 2015 and $169 million in 2016 as part of the unwinding of Fidelity. Excluding these one time expenses, MDU posted net income from operations of $150 million in 2015 and $ 233 million in 2016.

EPS has shown a similar volatility as net income. However, excluding income (loss) for discontinued operations, (i.e. Fidelity exploration business), EPS has grown quite nicely over the last decade.

For 2020, MDU is on track for another year of positive growth. For the 9 months ended September 30, MDU posted revenue of $4.148 billion compared to $3.959 billion a year ago, and net income of $278 million compared to $240 million a year ago. This confirms the company’s assessment that COVID-19 has had no material adverse impacts on results.

Looking ahead, MDU is well positioned to continue its solid performance. As of September 2020 it had a construction business backlog of almost $1.9 billion. Additionally, its utilities and pipelines business should continue its steady performance. With a payout ratio of 46%, MDU should continue its streak of dividend payments and yearly increases.

Valuation

Are we paying too much for MDU at the current share price?

During the last decade, MDU has traded at P/E ratio in the range of 11.75 (December 2010) – 17.09 (December 2019). We are excluding the outliers: P/E of 0 at the end of 2012 and 2015 when MDU posted losses; P/E of 79.54 at the end of 2016 following the large GAAP loss MDU posted in 2015. The current P/E of 14.37 is more or less at the midpoint of the range.

The current stock price of $27.00 is 6.9% above the 50-day average and 16.9% above the 200-day average. Additionally, it is at about the 70th percentile of the 52-week range. Even though the stock has trended upward since its March 2020 low point, it has not yet recovered to February 2020 levels (pre COVID-19 market crash).

Overall, MDU offers a good entry point at current levels.

Yield

How does the current dividend yield for AFL compare to historical values?

Over the last decade, the dividend yield for MDU has fluctuated between a low of 2.11% (March 2014) and a high of 4.28% (September 2015). However, a yield around 3% has been more the norm for MDU. The current TTM yield stands at 3.18%, and offers us the opportunity to initiate a position at an above average yield for the stock.

Thesis

Why are we adding MDU to the FiveTwenty portfolio?

MDU is basically 2 businesses in one. The construction business with it’s more rapid growth can act as a catalyst for future dividend growth. On the other hand, the more stable utilities business will provide a backstop if economic conditions deteriorate.

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