Northwest Natural Holding

Northwest Natural Holding Company: An Undervalued Utility

Suppose you are pursuing a distinguished dividend growth investment opportunity. In that case, our focus turns to an undervalued stock of particular interest – Northwest Natural Holding Company, identified by the NWN ticker.

It has found a place in my portfolio, and my recent acquisitions reflect my confidence in its potential. As of the time of writing, the stock is trading at $39.40 per share, prompting a closer examination of its valuation and suitability for investment. This analysis will assess whether Northwest Natural Holding Company merits consideration as a sound destination for our hard-earned capital.

Upon scrutiny using Fastgraph, the company’s financial outlook appears promising, with anticipated annual returns exceeding 34.4% for the next two years at the current share price.

NWN FastGraphs
Source: Fastgraphs

Here, we have a technical chart of NWN. We can see that it’s near a long-term trendline and down a few red bars on the monthly time frame. Also, it is lower than the COVID-19 lows.

NWN Stock Chart
Source: TradingView


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Overview of Northwest Natural Holding Company

Northwest Natural Holding Company (NYSE: NWN), operating through its subsidiary Northwest Natural Gas Company, delivers regulated natural gas distribution services to residential, commercial, industrial, and transportation clients in Oregon and Southwest Washington. The company manages the Mist gas storage facility, serving various utilities and third-party marketers, and provides natural gas asset management services. Additionally, it operates an appliance retail center. Northwest Natural Holding Company is involved in gas storage, water, and wastewater services, non-regulated renewable natural gas, and other investments. The company, established in 1859, is based in Portland, Oregon, and offers natural gas as well as water and wastewater connections in Oregon and southwest Washington.

Northwest Natural Holding’s stock price has experienced a significant decline of 52% from its peak in January 2020. Notably, this decline cannot be attributed to any internal issues within the company, as its earnings have remained consistent. Rather, the primary driver behind this decrease is the broader overvaluation of stocks, particularly within the utility sector, which has seen a downturn in performance, and the increase of interest rates by the U.S. Federal Reserve.

At present, the stock is trading at $39.40 per share, aligning closely with the lower end of its 52-week price range, which spans from $36.57  to $52.39 per share. This positioning suggests that NWN may present an attractive opportunity for investors seeking to acquire shares at a favorable price point.

NWN Dividend History, Growth, and Yield

We will look at NWN’s dividend history, growth, and yield. We will then determine if it’s still a good buy at current prices.

Northwest Natural Holding Company is considered a Dividend King, a company that has increased its dividend for over 50 years. NWN is also a Dividend Champion

In this case, NWN stock has increased its dividend for 67 consecutive years, one of the longest active streaks. NWN’s most recent dividend increase was 0.6%, announced in October 2023.

Dividend Growth

Additionally, according to Portfolio Insight*, NWN has a five-year dividend growth rate of about 0.5%, which is not good considering how fast inflation increased last year and this year. The 10-year dividend growth rate is a little higher at ~0.8%.

Portfolio Insight - Dividend Growth NWN
Source: Portfolio Insight*

Something to note is that NWN stock continued to pay its dividend during the most challenging period in the last 100 years. Many businesses and industries cut or suspended dividend payments during the COVID-19 pandemic. However, unlike many other stocks, NWN continued to pay and increase dividends. That is very noteworthy. This fact alone leads me to believe in the strength of the company and the fact that management is focused and committed to the dividend policy.

Dividend Yield

Northwest Natural Holding Company offers an appealing dividend yield of approximately 4.9%, surpassing the dividend yield of the S&P 500 Index. This robust dividend yield serves as an attractive starting point for investors who prioritize dividend growth in their portfolios. Additionally, it presents a solid choice for income-focused investors seeking a yield of 4.5% or higher from their investments.

Portfolio Insight - Dividend Yield History NWN
Source: Portfolio Insight*

The current dividend yield for NWN surpasses its 5-year average dividend yield, which stands at roughly 3.7%. This metric provides valuable insight into the company’s valuation. The relationship between stock price and dividend yield is inherently inverse, meaning that when stock prices rise, dividend yields tend to decrease, and vice versa. Investors can gauge whether the stock is undervalued or overvalued by comparing the current dividend yield to the 5-year average. In this context, the higher current yield relative to the 5-year average suggests that NWN may currently be trading at a relatively attractive valuation.

Dividend Safety

Ensuring the safety of the current dividend is paramount for dividend growth investors, as undervalued dividend stocks can sometimes become “value traps,” with stock prices continuing to decline. Two crucial metrics must be examined to assess the sustainability of annual dividend payments: Adjusted operating earnings (EPS) and free cash flow (FCF) or operating cash flow (OCF) per share. 

Analysts’ projections indicate that NWN is expected to earn approximately $2.67 per share for fiscal year 2023, and historical accuracy in forecasting NWN’s future EPS is noted at 92%. Furthermore, the company is anticipated to distribute $1.95 per share in dividends over the entire year. This results in a payout ratio of roughly 73% based on EPS, which is a little on the high side but leaves room for continued dividend growth. 

As a prudent approach, a payout ratio under 65% is preferred. NWN’s dividend yield ratio of approximately 4.9%, combined with expectations for future growth, supports this goal and allows the company to sustain dividend growth at a low-single-digit rate without compromising dividend safety. Additionally, NWN maintains a dividend payout ratio of 18% based on OCF, further affirming the dividend’s security in terms of EPS and OCF. 

NWN Revenue and Earnings Growth / Balance Sheet Strength

We will now look at how well NWN performed and grew its EPS and revenue throughout the years. When valuing a company, these two metrics are at the top of my list to study. Without revenue growth, a company can’t have sustainable EPS growth and continue paying a growing dividend.

NWN’s revenue has been growing reasonably at a compound annual growth rate (CAGR) of about 3.6% for the past ten years, according to Portfolio Insight*. Net income did much better with a CAGR of ~4.1% over the same ten-year period. However, EPS has grown 1/4% annually for the past ten years and at a CAGR of 2.2% over the past five years.

Portfolio Insight - Revenue NWN
Source: Portfolio Insight*

Considering the company’s track record of revenue, net income, and EPS growth over the years, our evaluation will primarily focus on its valuation and dividend yield. Analysts project that Northwest Natural Holding Co. will sustain a 5.8% annual growth rate in EPS over the next five years driven by bolt on acquisitions and capital investment to increase the gas utility rate base.

Notably, despite the challenges posed by the COVID-19 pandemic over the past two years, NWN achieved an 11% increase in EPS, rising from $2.30 per share in FY2020 to $2.56 per share in FY2021. Furthermore, analysts anticipate that NWN will attain an EPS of $2.67 per share for fiscal year 2023, reflecting approximately a 5% rise compared to FY2022. This consistent pattern of earnings growth is a positive indicator for investors, indicating the company’s resilience and ability to continue improving its financial performance. Additionally, the forecasted earnings for the subsequent years suggest a 5% increase in 2024 and another 7% growth in 2025, further bolstering confidence in NWN’s future earnings potential.

Balance Sheet

Furthermore, NWN maintains a robust balance sheet with a favorable debt-to-equity ratio of 1.3 with an A+ S&P Global credit rating. This strong financial position enhances the company’s capacity to navigate significant economic challenges, as evidenced by its stability during the COVID-19 pandemic’s two-year impact. This aspect also contributes to the security of the company’s dividend payments.

NWN Stock’s Competitive Advantage

Investing in Northwest Natural Holding Co. (NYSE: NWN) has advantages and disadvantages. On the positive side, the company operates in a stable utility sector, providing consistent demand for essential services like electricity and gas. This fact makes it appealing to income-focused investors due to its history of dividend payments. However, regulatory risks and limited growth potential are possible downsides, as regulation changes can impact pricing and profitability, and regulatory approvals constrain expansion opportunities. Additionally, interest rate sensitivity is a consideration due to the company’s reliance on debt financing.

Northwest Natural Holding Co. has competitive strengths, including a robust infrastructure that acts as a barrier to entry for competitors, a strong brand known for reliability, and a commitment to sustainability, positioning it well in a changing energy landscape. Investors should carefully assess these factors based on their financial goals and risk tolerance.


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Valuation for NWN

One of the valuation metrics that I like to look for is the dividend yield compared to the past few years’ histories. I also want to look for a lower price-to-earnings (P/E) ratio based on the past 5-year or 10-year averages. Lastly, I like to use the Dividend Discount Model (DDM). I use a DDM analysis because a business ultimately equals the sum of the future cash flow that the company can provide. 

Let’s first look at the P/E ratio. NWN has a P/E ratio of ~14.9X based on FY 2023 EPS of $2.67 per share. The P/E multiple is excellent compared to the past 5-year P/E average of 21.7X. If NWN were to revert to a P/E of 21.7X, we would obtain a price of $57.94 per share.

Now, let’s look at the dividend yield. As I mentioned, the dividend yield currently is 4.9%. There is good upside potential as NWN’s 5-year dividend yield average is ~3.6%. For example, if NWN were to return to its dividend yield 5-year average, the price target would be $54.17.

The last item I like to look at to determine a fair price is the DDM analysis. I factored in an 8% discount rate and a long-term dividend growth rate of 1%. I use an 8% discount rate because of the higher current dividend yield. In addition, the projected dividend growth rate is conservative and in line with its past 5-year average. These assumptions give a fair price target of approximately $28.14 per share.

If we average the three fair price targets of $57.94, $54.17, and $28.14, we obtain a reasonable, fair price of $46.75 per share, giving NWN a possible upside of 18.7% from the current price of $39.40.

Final Thoughts on Northwest Natural Holding Company

Northwest Natural Holding Company (NWN) is a high-quality company that aligns well with the needs of most investors. The company offers an attractive 4.9% yield, better than the broader market, and boasts a commendable track record of long-term dividend growth. Historical earnings growth has been impressive, although it’s important to note that past performance does not guarantee future results. Nevertheless, considering the current stock price, NWN is an appealing investment opportunity, presenting a potentially attractive proposition for investors seeking income and growth in their portfolios.

Disclosure: I do own shares of NWN

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My name is Felix Martinez, and I am a Dividend Growth Investor who has invested in dividend growth stocks for the past seven years. I also run a YouTube channel called FiscalVoyage. I have written for as well as I focus on undervalued dividend growth stocks with capital return and dividend income potential. Make sure to follow me on my YouTube Channel. See you there.

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