WGL Holdings Dividend Stock Analysis

Company Overview

WGL Holdings Inc. is a public utility holding company serving the Washington, D.C. metropolitan region.  The company is a holding company for 4 main businesses, and three more unregulated smaller ones.  The main subsidy, Washington Gas, has provided natural gas service to customers in the D.C. area for over 160 years and, today, serves more than one million people in the District of Columbia, Maryland and Virginia, including residential, commercial, and government customers.  

The company has both regulated and unregulated utility companies, of which the regulated ones account for 91% of assets.  I searched around online, and this is the best definition I found about the difference between regulated and unregulated utilities. 

            “About 50% of the country's markets, electricity markets, are regulated, meaning that you have elected officials or appointed government officials that work with utilities to set formulaic rates that they are able to charge.

            Use of the word “unregulated” is deceiving, because they have to deal with environmental regulations, the power markets still operate under the overview of state governments and the federal government.

Basically, there is an actual market where the marginal cost of providing electricity is what you'll receive if you're going to the market that day and selling your power. So there's no intermediary saying, "This is what the rate payer wants to pay and this is what we think they should pay."

So basically the regulated utilities are saying, "We want to charge our customers this much." The unregulated utilities are kind of selling power into this power market.”

This artice can be found here http://www.morningstar.com/cover/videocenter.aspx?id=335580

WGL serves customers in Delaware through their retail energy marketing subsidiary, Washington Gas Energy Services. In West Virginia, they maintain a natural gas storage facility to serve customers throughout the Washington Gas service territory. Washington Gas also provides wholesale delivery service to portions of West Virginia.

WGL talks of dabbling in “green” energy, but I have not found much about specific projects. 

Financial Analysis

Dividends

WGL has paid a dividend every year for 158 years.  They have increased their dividend every year for the past 33.

Dividend Growth	CAGR
10 year	1.89%
5 year	2.53%
1 year	3.52%

Payout Ratios	2009	10 yr Avg.
EPS	62%	74%
Cash	43.83%	24.96%

At the current price of 36.41, the stock yields 4.04%

Income Statement

Revenue Growth	CAGR	EPS Growth	CAGR
10 year	8.88%	10 year	3.23%
5 year	5.76%	5 year	3.16%
1 year	2.99%	1 year	2.58%

Margins	10 yr Avg.
Operating	8.09%
Net	4.45%

The company is not buying back shares but rather increasing them at a ten year CAGR of 1.92%

Balance Sheet

Balance Sheet Ratios	2009	10 yr Avg.
Current Ratio	1.08	1.04
Lg T Debt / Equity	0.51	0.69
Tot Debt / Equity	0.75	0.90
Debt / Total Capital	0.43	0.47
Cash Return / Tot Capital	8.73%	1.71%

Cash Flow

WGL has had 4 years of negative free cash flow in the past decade.  This is not a good sign.

Stock Price

Current Price	36.41
P/E	15.2
Est Forward P/E	15.6
Div Yield	4.04%
Int. Value	57.42
2011 Int. Value	58.98

	High P/E	Low P/E	High Yield	Low Yield
10 year	18.2	13.8	5.34%	4.07%
5 year	16.4	12.8	5.14%	3.94%

Qualitative Analysis and Conclusion

WGL is in the utility business, which is not known for being a high growth industry.  Most companies have a monopoly in their regions, and it would be almost impossible for a competitor to create the infrastructure necessary to compete.  As long as the population is growing, so is demand, and as long as people need power (which they always will) there is business.  However, the business is uber capital intensive, and regulated markets make it difficult to be a very profitable business.   

With that said, I do like WGL, for what it is.  As far as utilities go, the company is in a great area – Washington DC will always have a strong population, as it’s the nations capital.  And as DC and the surrounding areas become more desirable to non-government workers (it was voted one of the best places to start a business this year by Forbes), this will mean strong demand for energy, of which WGL is the provider. 

Revenues and EPS have shown decent growth, and the balance sheet is clean for this type of business, with low debt.  The dividend growth is pretty sluggish, but the payout ratio, both in earnings and cash, is acceptable for a utility company.  I do not like the annual increase in shares, or the 4 years of negative cash flow. 

Overall, I am not intersted in this stock.  The p/e and yield are good for a consumer goods company, but for a utility, which are known to be safe for “widows and orphans” I am not that excited.  Though I think WGL is a decent business, and can continue it’s dividend increases, I am not yet ready to trade strong dividend growth and capital appreciation for safety.  If the yield ever reaches 6% or more, I may reconsider.