Avista: This Renewable Titan Is Getting More Attractive

Summary

Avista Corporation is a somewhat underfollowed utility serving rural parts of the Pacific Northwest.

The company is one of the greenest in the country, with more than half its electricity being generated from renewable sources.

The company may be interesting to the giant ESG funds, which could provide a benefit to the stock price.

The company has a strong balance sheet and the 3.87% yield is quite sustainable.

The stock looks a bit overvalued relative to its peer group.

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steverts/iStock via Getty Images Avista Corporation ( AVA ) is a regulated electric and natural gas utility that operates in the Pacific Northwest. The utility sector, in general, has long been a favorite of conservative investors such as retirees because of the companies’ generally stable cash flows and relatively high dividend yields. Avista Corporation is certainly no exception to this as the firm’s current 3.87% yield is quite a bit higher than many other things in the market. In addition, utilities typically exhibit slow but steady growth over time but unfortunately, Avista’s latest results do not show this as the company’s fourth-quarter 2021 earnings were somewhat worse than its fourth-quarter 2020 numbers. With that said though, the long-term thesis that I outlined in my previous article on the company remains intact. Avista overall boasts a reasonably attractive valuation and solid total return potential and in fact, both of these are quite a bit more attractive than the last time that we looked at the company. About Avista Corporation

As stated in the introduction, Avista Corporation is a regulated electric and natural gas utility that serves customers located in Idaho, Oregon, Montana, and Washington. The company also has a utility operation in Alaska, which is obviously separate from the rest of its operations: Avista Investor Presentation This is a fairly large service area in terms of total land area but it is admittedly not an especially populated one. The company only serves about 770,000 customers throughout this entire area. The relatively small customer base does not necessarily make the company a poor investment compared to a larger utility, though. This is because Avista shares many of the same characteristics of its larger peers. The most important of these is generally stable cash flows. The reason why utilities as a whole tend to boast stable cash flows is that they provide a product that most people would consider to be a necessity in today’s world. As such, people will tend to prioritize paying their utility bills ahead of more discretionary expenses. We can see this stability by looking at the company’s annual operating cash flows over time: Seeking Alpha This general stability is one of the reasons why retirees and other conservative investors tend to appreciate utilities as investments since they tend to not deliver big losses during recessions as some other sectors do.

Another thing that we notice about Avista Corporation is that its customer base is almost evenly split between electricity and natural gas (although there are probably a great many people that are customers of both). This can be a nice thing because both of these products have a certain degree of seasonality. Natural gas, in particular, tends to see much higher consumption during the winter months than in the rest of the year due to its primary use in heating. Although electricity is consumed year-round, it tends to see much heavier use during the summer months to power air conditioners. The fact that the company’s business is reasonably well split between the two products should then have the effect of flattening out seasonal cash flow fluctuations compared to a utility that is only focused on a single product. With that said though, Avista does still see a surge in operating cash flows during the winter months since the climate of its service area causes a greater need for winter heating than summer air conditioning.

Another characteristic of utilities is that they tend to deliver slow but steady earnings growth over time. Although Avista Corporation’s fourth quarter 2021 net income was down versus the prior-year quarter, the company did still deliver full-year earnings per share growth: Avista Investor Presentation The company is poised to continue to deliver earnings growth going forward. This is because Avista is constantly investing in growing its rate base. The rate base is the value of the company’s assets […]

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