The stock market has done very well for most investors this year despite the coronavirus pandemic. The Dow Jones Industrial Average (DJI) is up ~6.3% year-to-date (as of December 29, 2020). The tech heavy S&P 500 (SPX) is up ~17.5% as of the same date and the NASDAQ-100 is up a mind boggling 48.1%. Compared to last year the Dow 30 and S&P 500 did not perform as well as in 2019, but the NASDAQ 100 had an extraordinary year driven by mega cap tech stocks. Many of these stocks seemingly defied gravity and benefitted from the COVID-19 pandemic. A robust IPO market also helped the NASDAQ this year. Everyone always likes to talk about the winners, but it is also instructive to take a look at the losers for the year. In some cases, these stocks are facing temporary difficulties and may be a good value. In this article, I discuss the three worst performing Dividend King stocks to date in 2020.
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The Dividend Kings Grew This Year
There were 28 Dividend Kings at the end of 2019. The number grew by three this year as Sysco (SYY), National Fuels Gas (NFG), and Black Hills Corporation (BKH) were added to this list. No Dividend Kings were dropped from the list in 2020. As I have noted before this is a rare occurrence.
National Fuel Gas is a diversified utility with upstream, midstream, and downstream assets. The utility owns regulated natural gas distribution segment with operations in western New York and Pennsylvania. The utility also conducts exploration and production in California and Appalachia, transports and stores natural gas in Pennsylvania and New York, and gathers natural gas in Appalachia. Sysco is a large food service and related-product distributor with operations in the U.S., UK, Canada, and France. Black Hills, which is the most recent addition, is a multi-utility with electric utilities, gas utilities, power generation, and mining operations. The utility operates in mid-west, upper mid-west, and Great Plains states.
Note that Sysco did not yet raise its quarterly dividend this year. It normally does so in the first quarter of the fiscal year. I wrote an article in April on why Sysco’s Dividend King status may not be safe. However, on an annual basis Sysco still has time to effect a raise and maintain its Dividend King and Dividend Aristocrat status.
3 Worst Performing Dividend King Stocks in 2020
So, after accounting for these changes the three worst performing Dividend King Stocks in 2020 were: Black Hill (BKH) at -20.1%, Federal Realty Investment Trust (FRT) at -31.2%, and Northwest Natural Holdings (NWN) at -36.1% as of this writing based on my watch list in Stock Rover*.
It is interesting to note that two out of the three worst performers are utilities, which are Black Hills and Northwest Natural Holdings. Utilities as a group have performed poorly this year relative to other sectors. Of the 11 sectors that are in Stock Rover*, utilities are the fourth worst performing sector at -2.7% year-to-date. The main reason is lower demand.
The other bottom performer is a real estate investment trust or ‘REIT’, Federal Realty Investment Trust. Real Estate is the second worst performer of the 11 sectors, only Energy has performed worse. Luckily, I have no exposure to either of these sectors in my dividend growth portfolio, so I was able to avoid the carnage. The main reasons real estate has performed poorly are declining occupancy rates, bankruptcies in the retail sector, and lower rent collection all due mostly to the COVID-19 pandemic.
All three of the poorly performed Dividend King stocks are dividend growth stocks, and they have decent yields making them of interest to my readers. I summarize the challenges each one had in 2020 as well as the positives as the basis for further research.
Black Hills Hit by COVID-19
Black Hills is like most utilities in 2020 that were hit by lower demand from commercial and industrial customers offset by somewhat higher demand from residential customers. It is not surprising why this occurred. Local government restrictions and social distancing requirements adversely affected many businesses and industries. For part of the second quarter, many businesses were simply closed. Even after reopening most businesses were only partially open and had limited operations. This caused lower demand nationwide for almost all utilities.
That said, some utilities that are mostly regulated with little exposure to the unregulated side have performed decently this year. Also, stock performance this year was dependent on the type of utility. Natural gas utilities or multi-utilities with greater exposure to natural gas or unregulated operations have not done as well. There is no surprise here as demand is lower almost everywhere for natural gas utilities. Operating costs are still high but with lower demand it impacts margins. In the case of Black Hills, natural gas makes up 83% of the customers and 56% of the rate base. Margins are lower than the trailing-twelve-months or ‘TTM’ mostly due to the impact of the COVID-19 pandemic in the second and third quarters as seen in the chart below.
Black Hills owns about 92% regulated assets (88% based on operating income) so the exposure to unregulated assets is relatively low. However, Black Hills does have exposure to coal mining, which is a commodity. Coal mining revenue makes up about 14% of revenue, which is not insignificant. The problem for Black Hills is that coal is being replaced as an energy source for electric utilities since it is higher cost and not as clean as renewables or natural gas. Only about a decade ago coal still made up about 60%+ of the generating capacity. That number is down to little over 40% now and likely heading lower. Which fuel sources are replacing coal? Natural gas, solar and wind have been on an upward trend over the past decade.
Not only does Black Hills have exposure to coal mining, but it also generates about 28% of its power from coal. Black Hills is increasing its wind generation capacity, but one could argue that Black Hills is late to the game for this. Some other utilities have aggressively moved into wind and solar power.
Some investors may be interested in Black Hills at the current price. The stock is down over -22% year-to-date and the forward yield is up to about 3.7%. The dividend is well covered by earnings with a payout ratio of approximately 62%, which is good compared to other utilities. The dividend has been raised for 50+ years and there is little risk at present that the dividend will be cut.
That said, there is some risk as local government restrictions have been reinstated in some states. Furthermore, the exposure to coal mining makes me pause and I would be more interested if the utility was close to 100% regulated. Lastly, there are other utilities with higher yields and track records of consistent dividend growth that are more interesting to me at the moment.
Federal Realty Facing Multiple Headwinds
It is rare that I write about REITs except from the perspective of dividend cuts and suspensions. Federal Realty is the one exception since it is the only REIT that is a Dividend King. I have only owned one REIT ever and that was back in the early-to-mid 2000s. I am glad that I did not own any REITs in 2020. The COVID-19 pandemic has had an outsized impact on the real estate sector, especially the commercial real estate sector.
It is no surprise on the reasons why this has occurred. Federal Realty like almost all commercial REITs was confronted by government mandated closures for many tenants and thus significantly lower rent collections. For Federal Realty, on May 1st only about 47% of tenants were open and operating. This improved to 82% by July 31st and 97% by October 30th. However, rent collections have not improved to the same extent. At end of Q2 2020, only 72% of rents were collected and that number improved to 85% by end of Q3 2020. Rent collections continue to be weak for retail, restaurants, health & beauty, and fitness categories.
That said, it still leaves 15% of rents not being collected. A lack of rent collections means a lack of cash flow. In turn this means that the dividend is not well covered by funds from operations or ‘FFO’. For Federal Realty to pay the dividend, it must currently use cash on hand or debt. Both are not desirable over the long-term. That said, Federal Realty has over $2 billion in liquidity from cash on hand and undrawn revolving credit facility.
Federal Realty is also dealing with continual pressure from e-commerce. Trends in place before the pandemic were only accelerated by the pandemic. Retailers and other business are rationalizing the physical footprint. Other retailers have declared bankruptcy. Less demand means lower rental prices over time.
Federal Realty is probably one of the handful of really well-run commercial REITs. But sometimes even being high quality or the best is not good enough in the face of multiple strong headwinds. The REIT is probably undervalued even after the uptick in early-November and the yield is almost 5%. But I am passing as the e-commerce headwinds will still be there even after the effects of COVID-19 fade.
Northwest Natural Has Higher Expenses
Northwest Natural Holdings is in rarified air when it comes to being a Dividend King. It has raised the dividend for 65 consecutive years. Only three companies have raised the dividend for 65+ years. Northwest Natural operates in a high growth area in Oregon and southwest Washington. About two-thirds of its customers are residential providing some protection from the impact of COVID-19. The utility also has a small water and wastewater operation (7% of net income). This is growing rapidly through acquisition and the number of people served has tripled in less than three years.
This year has been difficult for Northwest Natural as operating expenses have increased and margins have declined. COVID-19 has impacted earnings, but that is not all as the higher operations & maintenance costs and depreciation are also taking a toll. Utilities generally try to push through rate increases to compensate for higher costs. Northwest Natural has not been successful in this regard in Oregon. While the rate base was increased the ROE was held flat and ROR is actually lower in the latest rate case.
Northwest Natural was overvalued for years before COVID-19. The valuation is more acceptable now but still somewhat high relative to other utilities. Northwest Natural is currently yielding almost 4.2%. This is decent. Small investors may want to take a look here for further research.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.