Written by Summary
RGC Resources is a fairly small Virginian utility that boasts incredibly stable YOY cash flows and a growing dividend.
The company is able to easily afford its dividend, which means that it can certainly continue to pay its 3.41% yield.
The company is more conservatively financed than its peers, which is always an advantage.
The company has a history of delivering fairly solid EPS growth but unfortunately, it does not appear likely to be able to continue this track record.
The valuation appears reasonable at the current level.
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Marvin Samuel Tolentino Pineda/iStock via Getty Images RGC Resources, Inc. ( RGCO ) is a regulated natural gas utility that serves customers throughout Virginia’s Roanoke area. Admittedly, this is a fairly small utility with just over 60,000 customers but it shares many of the characteristics that have made investors appreciate utility companies. This is particularly true for conservative investors that tend to enjoy the reasonably stable cash flows that these recession-resistant companies enjoy. The companies in the utility sector also typically boast reasonably high dividend yields compared to many other sectors in the economy. RGC Resources is no exception to this as the stock yields 3.41% at the current price, which is substantially higher than the 1.29% yield on the S&P 500 index ( SPY ) as a whole. The company, unfortunately, does not look to be likely to deliver the growth rate of some of its peers but it does have a few features that might make it attractive to the right kind of investor. About RGC Resources
As mentioned in the introduction, RGC Resources is a natural gas utility serving customers in Roanoke, Virginia and the surrounding area: RGC Resources Investor Presentation Although Roanoke itself is a moderately-sized city of 100,000 people, this is not overall an especially populated area. As such, RGC Resources is not nearly as large as many of the other utilities that I have discussed on this site. Currently, the company only serves approximately 62,600 customers. The small size is not necessarily a problem though as the company is still able to make money and shares many of the same traits as other utilities. The most notable of these is that it enjoys very stable cash flows. This makes a great deal of sense as the company provides a product that many people consider to be a necessity and as such, they will typically prioritize paying their utility bill ahead of other more discretionary expenses during times when money gets tight. This allows utility companies like RGC Resources to be highly resistant to any fluctuations in the economy, which is exactly the kind of thing that a conservative investor, such as a retiree, can appreciate. We can see this stability quite clearly by looking at the company’s revenues and gross profits from the past several quarters: Seeking Alpha There may admittedly be some readers that point out that the company’s revenues and profits tend to spike during the first and fourth quarters. This is not particularly unusual for a natural gas utility because the demand and consumption of natural gas tend to be seasonal. This is because the primary use of natural gas is as a fuel for heating homes and businesses, so it will naturally see much higher than normal demand during the colder months. These are during the fourth and the first quarters of the year. The fact that consumption is higher during these months results in the natural gas utility seeing higher revenue during that time. We can see the overall stability much more clearly if we look at the company’s full-year numbers over time. Here they are: Seeking Alpha This overall stability should serve as a source of comfort because it helps dramatically with financial planning. After all, it is much easier for management to craft a budget and plan for the long term if the company’s finances are reasonably stable. Generally speaking, this works out much better for investors over extended periods than if the company’s finances are constantly in flux.
As investors, we are not solely interested in stability as we also like to see growth. Unfortunately, this is an area in which utilities do not often perform as well as many other industries. This is because they are monopolies that are confined to a single geographic area. As a […]
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