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Stock Analysis: Piedmont Natural Gas (PNY)

Linked here is a detailed quantitative analysis of Piedmont Natural Gas (PNY). Below are some highlights from the above linked analysis:

Company Description: Piedmont Natural Gas is a energy services company that distributes natural gas to 1,016,000 residential, commercial and industrial customers in portions of North Carolina, South Carolina and Tennessee.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number
PNY is trading at a discount to only 3.) above. The stock is trading at a slight discount to its calculated fair value of $26.17. PNY earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
  1. Free Cash Flow Payout
  2. Debt To Total Capital
  3. Key Metrics
  4. Dividend Growth Rate
  5. Years of Div. Growth
  6. Rolling 4-yr Div. > 15%
PNY earned one Star in this section for 3.) above. The Star earned was for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1956 and has increased its dividend payments for 32 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
  1. NPV MMA Diff.
  2. Years to > MMA
PNY earned a Star in this section for its NPV MMA Diff. of the $616. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as PNY has. The stock's current yield of 4.27% exceeds the 4.02% estimated 20-year average MMA rate.

Other: PNY is a member of the Broad Dividend Achievers™ Index.

Conclusion: PNY earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks PNY as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $27.49 before PNY's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 32 years of consecutive dividend increases. At that price the stock would yield 4.04%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 3.2%. This dividend growth rate is less than the 3.7% used in this analysis, thus providing a slight margin of safety. PNY has a risk rating of 1.25 which classifies it as a low risk stock.

PNY enjoys a simple business model within a stable market. I have been looking to increase my utility allocation, but have been uncomfortable with the underlying financials. At 3 Stars PNY is, by far, the highest ranked utility that I follow. At 52%, its debt to total capital is slightly above the 45% I prefer, but is not out of line with other utilities. Its free cash flow payout of 34% is well below the 60% maximum I look for and its 4 years if negative free cash flow in the last 10 years compares favorable with other utilities. Although the stocks dividend yield at 4.27% is lower than several others, its dividend growth rate of 3.74% is much higher. Overall, PNY is worthy of additional consideration when it is trading below my buy price of $26.17 and as my allocation allows. For additional information, including the stock's dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in PNY (0.0% of my Income Portfolio). See a list of all my income holdings here.

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