Our rating on Southwest Gas Holdings Inc. (NYSE: SWX) is HOLD.
We expect above-average growth in the company’s rate base from infrastructure investments, as well as continued profitability in its nonregulated operations. The shares currently yield about 2.9%.
On August 6, Southwest Gas reported consolidated 2Q20 EPS of $0.68, up from $0.41 in 2Q19. The 2Q20 results included $0.22 per share in other income due to increases in the cash surrender value of company-owned life insurance policies (COLI), compared to $0.06 share associated with these policies in 2Q19.
Consolidated 2Q20 net income was $38.1 million, up from $22.1 million in 2Q19. The natural gas segment contributed net income of $11.9 million, while the utility infrastructure services segment posted net income of $26.3 million, compared to $18.9 million.
According to management, the utility business benefited from improved operating performance as well as a COLI tailwind of $12 million as the underlying securities rebounded following a decline in 1Q20. The company is awaiting new rate case decisions in Nevada, California and Arizona by the end of 2020.
EARNINGS & GROWTH ANALYSIS
Southwest is scheduled to report 3Q20 results on November 4.
Sales of natural gas over the next 4-5 years are also expected to be stronger than average. Population growth in the southwestern U.S. has also led to wider margins.
FINANCIAL STRENGTH & DIVIDEND
We expect 2020 capital expenditures of approximately $850 million in support of customer growth, system improvements, and accelerated pipe replacement programs. The 2Q20 profit margin was 12.4%, up from 11.3% in 2Q19.
The current annualized dividend is $2.28 per share. Southwest plans to increase the dividend such that the payout ratio approaches the gas distribution peer average of 70%-75%, while also maintaining its strong credit ratings.
MANAGEMENT & RISKS
John P. Hester is president and CEO of Southwest Gas Holdings, and Gregory J. Peterson is SVP and CFO.
Given the company’s strong and growing customer base, we believe that management should be able to rely more on internal resources and less on external financing to fund construction programs and make acquisitions.
Southwest Gas Holdings has two business segments: Southwest Gas Corp., which provides natural gas service to approximately 2 million customers in Arizona, Nevada, and California, and Utility Infrastructure Services (Centuri), a construction services operation serving the North American utility, energy, and industrial markets.
Southwest Gas Corp. was founded in 1931 and is headquartered in Las Vegas.
We think that SWX shares are fairly valued at recent prices near $64. SWX trades at 15-times our 2021 operating EPS estimate of $4.21.
We also view recent rate increases in the company’s Arizona, California and Nevada service territories as strong positives.