EUR 850.00 For Business Accounts Only

Morningstar | NJR's outperformance in 2018 and wind asset sales should help self-fund investments.

Despite its diversification into nonutility energy businesses, New Jersey Resources continues to collect about two thirds of its earnings from high-quality gas distribution and midstream operations.NJR has an enviable combination of constructive regulation and customer growth in New Jersey that has resulted in an impressive record of earnings and dividend growth. Customer growth continues well above 1% annually, and state regulators have supported infrastructure investments that should drive earnings growth for at least the next four years. Investors seeking a consistent and well-run income machine should watch for a buying opportunity. New Jersey's constructive regulation reduces the cash flow drag between investment and rate recovery. This allows NJR to support a high payout ratio and impressive dividend growth. NJR had gone nearly 10 years since a base rate review before 2017, remarkable in the utilities industry. Not surprisingly, regulators cut NJR's allowed returns on equity to 9.75% starting in 2017, but cheap financing has offset some of that drag. We think NJR can increase earnings and the dividend 7% annually through 2022 with minimal regulatory risk.NJR's nonutility businesses such as retail energy marketing and solar energy have grown to more than one third of consolidated earnings. These have much different risk profiles than the core distribution utility but have generated good cash flows to support the utility's growth investments.Investments in renewable energy should continue to provide growth as NJR capitalizes on its low cost of capital and tax incentives. However, we expect that growth to slow as new projects attract more competition and lower returns, as we've seen in the wind energy market. Solar in New Jersey is the most financially attractive because of the renewable energy credits NJR can sell to the electric utilities at premium prices.The retail marketing business adds volatility to results as gas prices, basis spreads, and usage change year to year. Extreme winter weather in 2014-15 and a cold 2018 winter highlighted the option value of this business, and operations are fairly conservative.