The utilities sector accounts for only about 2% of publicly traded, US-based stocks. But it accounts for 19% of all Dividend Kings (stocks with 50+ years of consecutive dividend increases). Utilities have the highest probability of being a Dividend King versus any other sector. I like Black Hills Corp. (BKH), counsels Ben Reynolds, editor of Sure Retirement.
What makes utilities unique is that they are considered natural monopolies. Building multiple sets of competing infrastructure (power lines, water pipes, etc.) would be inefficient and prohibitively expensive. As a result, it is more practical for a single company to serve all customers in a given area. And this creates a monopoly on an essential service – a great place to be for a business.
To mitigate the potential abuses of monopolistic power, utilities in the US are regulated by various government bodies. At the state level, Public Service Commissions (PSCs) or Public Utility Commissions (PUCs) oversee utility operations, ensuring that rates are fair and services are reliable. The Federal Energy Regulatory Commission (FERC) also plays a significant role at the interstate level.
(Editor’s Note: Ben Reynolds is speaking at the Powerful Investing & Trading Strategies Virtual Expo, which runs Aug. 20-22, 2024. Click HERE to register.)
These commissions determine the rates utilities can charge through a process known as “rate cases,” where utilities must justify their costs and proposed rates. One of the primary methods used to regulate utilities is “cost-of-service” regulation. Utilities are legally allowed to charge rates that cover their operating expenses plus a reasonable return on their investments.
This return is typically based on the value of the infrastructure they build. In practice, utilities are often able to get rate increases, allowing them to grow over time. At the same time, utilities will very rarely grow rapidly, due to the regulated nature of their businesses.
Black Hills Corp. (BKH)
As for BKH, it is a utility that provides electricity and natural gas to customers in Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. It was founded in 1941 and now has a market capitalization of around $3.9 billion.
BKH reported first-quarter earnings results on May 9. The company generated revenue of $730 million, which was a 21% decline from the prior year. This decrease was a result of a drop in the company’s fuel and purchased power costs, however.
Black Hills generated earnings per share of $1.87 during the first quarter, which was above the consensus estimates. This was also an 8% increase year-over-year. The company’s Q1 and Q4 are seasonally stronger quarters due to higher natural gas demand for heating, which was again showcased by the above-average profitability during the first quarter.
Recommended Action: Buy BKH.
