Atmos Energy (ATO 0.36%) is a top dividend stock that has managed to increase its dividend for 34 years. This record makes Atmos Energy one of the best dividend paying stocks in the United States. Even better, management recently announced that it was increasing the dividend, yet again, by 7.8% over last year's payout.
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The ability to consistently raise cash dividends is one of the most real signs of a stable business and a top dividend stock. And Atmos, as a regulated natural gas distributor, is ideally positioned to increase its dividend for many years to come. Here are all the critical facts about Atmos' business that its investors should keep in mind.
Rise of natural gas
Natural gas is a vital component of our world. Not only is it used for electricity generation, but millions of Americans use it to cook their food and heat their homes. But is also growing in popularity thanks to its domestic abundance and relatively low carbon emissions:
Image Source: Statista.
Natural gas is considered to be a companion to renewable energy sources wind and solar. Even where renewable energy usage is common, natural gas is a backstop to its inherent unpredictability.
But it wasn't always easy to guarantee the steady supply of natural gas to homes and businesses.
Finding the right balance
The distribution of natural gas was not always a regulated market. Over a century ago, as citizens began to rely on natural gas more and more in their daily lives, it became more and more fundamental to life in America. And with increased use (particularly across municipal boundaries), came disputes.
In the first decades of the 20th century, more and more Americans gained access to what we now consider essential utilities. By the 1930s, the conflict between utilities and governments reached a boiling point.
So, in 1935, Congress passed the Public Utility Holding Company Act. The law limited the ability of a single holding company to control different utilities in an individual market.
Then, in 1938, the Natural Gas Act (NGA) gave the Federal Government authority over the interstate sale of natural gas. The move was a step towards giving local governments and consumers a way to combat monopolistic trends. However, despite the 1938 decision, the market for natural gas distribution remained free market-based and a large distributor could, theoretically, do harm to the consumer.
The potential for distributors of gas to charge high prices changed with the 1954 Phillips Petroleum Co. v. Wisconsin decision made by the Supreme Court. It lumped gas distributors and together under the 1938 Natural Gas Act.
Basically, distributors like Atmos Energy became more like utilities. And rates charged by distributors like Atmos Energy would be the sum of a pre-determined ‘cost-of-service’ plus a reasonable profit. The 1954 decision set a ceiling on what was considered to be excess pricing, but it had an unintended consequence: The cost to produce and deliver natural gas can varies across the U.S.
To solve this problem, the Federal Government (then still overseeing natural gas rates nationwide) divided the country into five geographic regions in 1960. It then calculated reasonable natural gas prices for each area.
The move was a step in the right direction but still led to inefficiencies. The situation became so desperate that supply shortages (some of which forced schools and factories to close briefly) were not uncommon in the 1970s.
The natural gas market we know today emerged in 1978 with the passage of the Natural Gas Policy Act (NGPA). The goal was set fair pricing for all stakeholders and ensure supply and demand are in equilibrium. Thus began a wave of deregulation that continued into the 1980s and culminated with the Federal Energy Regulatory Commission's (FERC) Order 436.
The FERC's order changed the way interstate pipelines work. It allowed pipelines (like Atmos Energy) to act solely as transporters of natural gas by establishing a framework for them to do business with customers they would otherwise not have access to. This process became known as "Open Access."
Growing up alongside the natural gas industry
Atmos Energy traces its roots back over a century. It would not be a stretch that it grew up right alongside the natural gas distribution industry itself. Today it operates as a vital part of today’s open-access, rate-regulated natural gas market.
Atmos’s business is to ensure consumers have the natural gas needed to live their lives and run their businesses at a reasonable cost. It spends over $1 billion a year on the safety and maintenance of its pipeline network. These capital expenditures are vital in ensuring the shortages of the 1970s never occur again. For its efforts, the company earns a reasonable rate of return decided upon state regulators.
Atmos Energy doesn’t own any natural gas production. It owns the networks and storage facilities that ensure the steady flow of natural gas to customers. It arranges the purchase of gas with marketers, producers, and even competing pipeline companies. Last year, its most prominent suppliers included BP and Centerpoint Energy.
Gone are the "Wild West" days where monopolistic utilities could charge usurious prices. But so too are the shortages of the 1970s where producers and distributors had little incentive to produce.
Predictable profits, thanks to regulation
Rising demand for natural gas, coupled with the certain-returns of pre-set rates, has made Atmos a consistent profit machine:
ATO Return on Equity (TTM) data by YCharts
ATO EPS Diluted (Annual) data by YCharts
Atmos' unique position in the natural gas distribution market has made it an extremely predictable business.
In its latest earnings release, management reiterated that they planned to continue enhancing the safety and reliability of its distribution system whilst simultaneously rewarding shareholders with ever-growing earnings and dividends. For FY 2018, it expects EPS from continuing operations of $3.75-$3.95 (up from $3.60 in 2017).
What investors need to know
As a regulated distributor of natural gas, Atmos Energy has a great deal to offer dividend investors looking for certainty. But its record speaks for itself. Its share price has increased by approximately 196% over the past 10 years, almost double the S&P 500's 83% return. And its dividend, as previously mentioned, has been increased every single year for 34 years. ATO currently yields 2.28%.
It took nearly a century of shifting regulations to bring us to today's natural gas marketplace. With increasing natural gas demand, and the lessons of the 1970s supply shortages in mind, we can be reasonably sure regulators will allow Atmos (and its shareholders) to be fairly compensated for ensuring customers have the natural gas they need.
