Summary
Otter Tail is one of the more unique utilities around because it derives about 30% of its net income from manufacturing.
The company’s manufacturing operations have completely recovered from the effects of the pandemic and could be a source of growth going forward.
The company is investing in renewables but is not being as aggressive as many of its peers.
The company’s balance sheet is incredibly strong and the dividend appears to be quite sustainable.
The stock currently has an attractive valuation relative to its peers.
Looking for a helping hand in the market? Members of Energy Profits in Dividends get exclusive ideas and guidance to navigate any climate. Learn More »
Otter Tail Corporation (NASDAQ: OTTR ) is a regulated electric utility serving customers in Minnesota and both of the Dakotas. The utility sector is generally a favorite among conservative investors such as retirees due to its general stability through any sort of macroeconomic environment. Otter Tail Corporation is something of an oddity among utilities though since the company also has a manufacturing arm. This manufacturing arm proved to be something of a liability for the company during the pandemic because the shut downs had quite an adverse effect on the businesses that comprise this area. They have since recovered in a very big way, however, and today the corporation’s performance is largely back to normal. In fact, the company’s most recent results show considerable growth compared to 2020, which is largely what I predicted in my last article on the company. Otter Tail is positioned to continue to deliver growth over the coming years and when we combine this with a very reasonable valuation, it might be worth considering for your portfolio. About Otter Tail Corporation
As stated in the introduction, Otter Tail Corporation is primarily a regulated electric utility serving customers in parts of Minnesota and the Dakotas: Otter Tail Investor Presentation The company also has a few materials manufacturing businesses that will be discussed later in this report. However, since 70% of the company’s profits come from the electric utility, it should be largely thought of in this way. This is a fortunate thing for a certain type of investor because utility companies tend to enjoy remarkably stable finances over time and through any economic conditions. This is because utilities provide a product that is generally considered to be a necessity for our modern way of life. As a result, people will typically prioritize paying their utility bills ahead of other more discretionary expenses during times when money gets tight. This was especially helpful during the events of 2020 as utilities like Otter Tail Corporation were able to weather through the economic calamities of that year much better than companies in numerous other industries.
Another defining characteristic of utilities is that they typically deliver slow but steady growth. Otter Tail has not been an exception to this as it has grown the net income from its utility operations during each of the past three years: Otter Tail Investor Presentation This is due to the fact that these companies are constantly growing their rate bases. The rate base is the value of the utility’s assets upon which regulators allow it to earn a specified rate of return. As this rate of return is a percentage, any increase to its value allows the company to increase the prices that it charges its customers in order to earn that rate of return. The usual way that a utility increases its rate base is by investing money into upgrading, modernizing, and even expanding its utility infrastructure. This is exactly what Otter Tail Corporation has been doing, a trend that it intends to continue going forward. Over the 2022 to 2026 period, the company plans to invest $978 million into growing its rate base: Otter Tail Investor Presentation This should have the effect of growing the company’s rate base at a 5.9% compound annual growth rate over the period, taking it from $1.58 billion today to $2.10 billion by the end of 2026. As some astute readers may point out, this is a lower value increase than the amount of money that the company is investing. There are two reasons for this. The first reason is that some of the company’s spending is earmarked for the purchase of items that will replace assets being taken out of service. In particular, Otter Tail is expecting to shut down the Hoot Lake Coal Plant in the near future. Once this plant […]
source Otter Tail: Clearly Recovered From The Pandemic But Still Boasting An Attractive Valuation
Protected by Patchstack