Ben Reynolds — editor of Sure Dividend — concludes his review of his top five Dividend Aristocrats — selected from among those stocks in the S&P 500 Index that have each increased their dividends for 25 years in a row or longer.

When investors think of the Dividend Aristocrats, it is likely that well-known stocks like McDonald’s Corporation (MCD) or Johnson & Johnson (JNJ) come to mind.

More from Ben Reynolds: Dividend Aristocrats Part 4: Johnson & Johnson

And while these industry giants are certainly worthy stocks to buy and hold for dividend growth, there are a number of lesser-known Dividend Aristocrats that have maintained long histories of growing their dividend payouts.

For example, Atmos Energy (ATO) does not receive a great deal of attention, but it is a shareholder-friendly company that has increased its dividend for 37 years in a row.

Read Part 1 of this special report here.

Read Part 2 of this special report here.

Read Part 3 of this special report here.

Read Part 4 of this special report here.

Atmos Energy  has a market-beating 2.5% yield right now, making it an attractive pick for investors looking for a mix of dividend yield and growth.

Low-Volatility Business Model

Atmos Energy is a regulated natural gas utility serving over 3 million residential and business customers in 8 states. Texas is its most important individual state, accounting for over 60% of the company’s distribution rate base. Distribution is the bigger business at two-thirds of annual net income, with its pipeline and storage business representing the other one-third.

Utilities have a reputation for being slow-growth investments, but Atmos Energy has bucked this trend with its recent quarterly reports. Atmos reported second-quarter financial results on May 5th, with revenue and earnings-per-share beating analyst estimates. Revenue increased 35% year-over-year.

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Consolidated operating income grew 15% due to favorable rate outcomes in both operating segments, as well as customer growth in the distribution business. Diluted earnings-per-share increased 18% for the quarter.

Over the first two fiscal quarter, Atmos Energy grew its operating revenue by 20% and its earnings-per-share by 17% compared to the same six-month period last fiscal year. For the full year, Atmos Energy expects earnings-per-share in a range of $4.90 to $5.10. Therefore, 2021 will be another highly profitable year with steady growth.

Through customer additions and rate base growth, Atmos Energy expects 6% to 8% annual growth in its adjusted earnings-per-share going forward. This will be more than enough growth to maintain the dividend payout, and continue to increase their dividend payout at a similar growth rate each year.

Competitive Advantages Fuel Long-Term Dividend Growth

Atmos Energy has a long and impressive dividend history. The company has increased its dividend each year for the past 37 years. This period of time has included multiple recessions and market crashes, yet Atmos Energy keeps chugging along. No company can hold such a long history of steady dividends without durable competitive advantages.

Indeed, Atmos Energy maintains key competitive advantages that have allowed the company to maintain an impressive history of dividend growth.

First, as a regulated utility, Atmos Energy has a predictable level of earnings with a blended allowed return on equity of 9.8%. This ensures the company will stay profitable. Atmos Energy has grown its earnings-per-share for 18 consecutive years.

Another competitive advantage is that as a utility, Atmos Energy operates a highly recession-resistant business model. People will always need utility services, even in a severe recession, which again helps provide steady demand that fuels the company’s dividend payout.

Lastly, barriers to entry are extremely high in the utility sector. The company’s network of assets includes 72,000 miles of distribution and transmission mains, 5,700 miles of interstate pipelines and 5 storage facilities with 46 billion cubic feet of natural gas working capacity.

It is almost impossible for a new competitor to enter the industry and take market share from Atmos Energy, given the extremely high capital and regulatory requirements necessary to build out an energy distribution and storage network. For its part, Atmos Energy expects $11 billion to $12 billion in capital investment through 2025, indicating the scale of the business.

Dividend Safety

Utility stocks are primarily owned for their dividends. As a result, it is important for investors to assess the safety of a utility stock dividend before buying shares. Fortunately, Atmos Energy appears to have a very strong level of dividend safety, due to the company’s regulated business model, strong assets, and long-term growth.

See also: Dividend Aristocrats Part 3: AT&T

Another factor helping secure the dividend payout is the company’s healthy balance sheet. Debt is one of the biggest concerns that investors should have regarding utility stocks, as utilities utilize debt to maintain their capital investments.

To that end, Atmos Energy has strong credit ratings of A- from Standard & Poor’s and A1 from Moody’s. Keeping investment-grade credit ratings helps utilities like Atmos Energy lower their cost of capital, which in turn boosts their profitability and supports the dividend.

Finally, Atmos Energy has a long-term dividend payout ratio target of 50%. This is a healthy long-term payout ratio which ensures enough capital is available for investment in growth initiatives, while leaving plenty of cash flow available for dividends.

With expected EPS of $5.00 at the midpoint of the company’s fiscal 2021 guidance, and a current annualized dividend payout of $2.50 per share, Atmos Energy is right on target.

Expected Returns

Atmos Energy should continue to generate returns for shareholders in the years ahead, through earnings-per-share growth and dividends. The stock currently trades at a price-to-earnings ratio slightly above 20, compared to our fair value estimate of 19.

While shares might be a bit overvalued today, it is also common for a quality blue chip company to hold a premium multiple. Therefore, we do not see a big swing in either direction in the valuation multiple moving forward.

At the same time, we expect the company to generate annual EPS growth of 6% over the next five years. Combined with the 2.5% dividend yield, this leads to total expected returns in the area of 8% per year over the next five years. This would be a satisfactory rate of return for income investors looking for a quality dividend stock, with lower stock volatility.

Final Thoughts

Atmos Energy is a lesser-known Dividend Aristocrat, but it could be an attractive pick for income investors looking for dividend safety. The company also stands out as a higher-growth stock than the typical utility.

The current dividend yield is 2.5%, which is significantly higher than the broader S&P 500 Index which currently yields 1.4% on average. And, Atmos Energy should continue to increase its dividend annually for many years to come, making it a top Dividend Aristocrat.

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