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The utilities, as a group, have been somewhat forgotten this year. Growth stocks and stay-at-home plays have dominated the headlines, and indeed powered the indices higher, but for long-term dividend-oriented investors, value abounds in the utility space. One such example is UGI Corporation (UGI).

The stock fell by half from pre-COVID levels to the bottom in March and has since rebounded nicely. However, the stock has carved out a channel since June, chopping more or less sideways since then. As of now, UGI has seen several strong up days, and is threatening a breakout of that channel, which would mean a move above $36 that is sustained. I cannot say for sure that a breakout is coming, but conditions are right, so that is something to keep an eye on.

We can see that the gas utilities group has been unbelievably weak this year against the broader market, but that is to be expected during a raging bull run. UGI has outperformed its peers in a huge way since the March bottom, so I think it is set up well technically, with well-defined resistance and support in the channel I mentioned, and a clear breakout level.

Fundamentally, I like UGI as well, and I see it as a buy.

A history of growth

Growth can very obviously be challenging to come by when you’re looking at utilities. It’s a very unique model where governments and regulatory authorities get to decide how much the company charges for their product, which necessarily limits revenue expansion. However, utilities are free to acquire customers and indeed, other utilities, in order to gain scale. Over time, UGI has done just that.

Source: Seeking Alpha

Revenue growth has been choppy in recent years, and this year is almost certainly going to see a lower revenue total against last year given reduced demand from COVID-19, particularly from commercial customers. However, there is a swift return to top line growth in the offing for next year, and it certainly makes sense that, as the economy returns to something of a normal state, we’d see UGI get back on its growth track.

Below, we can get a sense of just how much investment UGI has made over the years in order to reach where it is today.

Source: Company website

The bar for investment capital is higher for utilities because options are limited by regulatory authorities, but UGI has managed to do it, and the market has rewarded shareholders with a much higher share price over the years.

I like UGI’s mix of organic growth projects and acquisitions, because an acquisition-only strategy is very expensive and doesn’t always work. Organic projects can also be expensive, but in general, that is the cheaper way to go to achieve growth over paying a premium to the market value of a target company.

UGI’s diversification is also a draw for me because it doesn’t operate a single business line utility, like many of the company’s smaller competitors do. UGI is highly diversified with its core natural gas and electric utility business, which serves more than 700,000 people, its midstream business, the recently-acquired AmeriGas business, as well as its international utility services in western and central Europe. This isn’t a mom and pop small town utility by any means; it is a carefully crafted utility conglomerate with several distinct lines of business.

Source: Company website

UGI has publicly committed for some time to at least 6% annual EPS growth, and 4% annual dividend growth.

Source: Company website

As we can see, the company doesn’t always hit that target, but over time, it delivers. The nature of UGI’s diversified business, as well as the fact that it is constantly making growth investments, means earnings can be lumpy from time to time. However, holders of utility stocks generally have longer time frames than traders hopping on the next hyped tech stock, so I’m not sure the lumpiness is all that consequential. If you want a utility to hold for a long time, the sort of numbers you see above are likely what you’re after.

The dividend is a big draw

Then there’s the dividend, which is obviously of great importance to most utility investors.

Source: Company website

UGI has managed to boost its dividend by an average of 7% over the last 20 years, and 9% over the past decade, which is obviously quite robust by any standard. Many utilities can afford only token increases each year, but UGI is quite serious about a strong value proposition to shareholders.

Below, we can also see that the yield is currently quite high by historical standards, which I firmly believe adds to the idea that the stock is cheap.

Source: Seeking Alpha

UGI’s yield stood around 2% for much of the past five years, but in 2020, the stock has been pummeled and that has driven the yield up. You can currently buy what I believe to be one of the best utilities in the market today for a 3.7% yield and the knowledge that EPS and the payout will almost certainly rise meaningfully over time. Perhaps more than anything else, the chart above shows just how much value UGI offers today.

And speaking of value, UGI is quite reasonably priced on its forward earnings.

Source: Seeking Alpha

Shares trade at just 12 times next year’s earnings when its five-year average is closer to 19. That’s a very long way from where we are today, and with historically low interest rates that should be supportive of yield-based securities – like utilities – I see the UGI situation as extremely attractive today.

The bottom line

UGI has proven over time it can win in a tough space. It will acquire or build the growth needed for the next decade and beyond, as it has proven it can do for so many years. The dividend is a priority and should continue to see meaningful growth, and I think the stock is way too cheap. Putting all of that together makes UGI a strong buy.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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