Domestic-focused natural gas distribution companies in the Zacks Utilities sector are consistent performers and regularly reward their investors with dividends. Natural gas distribution companies offer services to transport natural gas from the region of production to millions of consumers across the United States.
This natural gas distribution industry plays a vital role in delivering natural gas from intrastate and interstate transmission pipelines to consumers through small-diameter pipelines. The United States has 3,353 trillion cubic feet of natural gas, and a natural gas pipeline network of 2.6 million miles is utilized to distribute gas to customers.
Utility operation is capital intensive, as consistent investment is required to upgrade, maintain and replace old pipelines and maintain and expand infrastructure to provide reliable services to an expanding customer base. Funds generated from these internal sources are not always enough to fund the big projects. Hence, utilities depend on the credit market for funds to carry on upgrades.
Utilities are traditionally averse to interest rate hikes. After a series of rate hikes, the Federal Reserve has finally lowered the benchmark rate, with three rate cuts lowering the existing rates by 100 basis points and bringing rates to a range of 4.25-4.50%. There is a possibility of more rate cuts next year. The decline in rate will assist these natural gas distribution companies.
As the interest rates are coming down, capital-intensive gas distribution utilities like Atmos Energy Corporation ATO and New Jersey Resources Corporation NJR are good stocks to add before the year-end.
Investment in Utilities is a Safe Option
Utilities are always considered safe investment bets due to the nature of the services they provide to other industries. Stable performance and consistent dividend payment abilities makes these utilities attractive to investors. The consistent dividend payment ability makes utilities a bond substitute for investors.
Per a report from the U.S. Energy Information Administration, natural gas prices at Henry Hub (dollars per million British thermal units) are expected to increase nearly 36.4% year-over-year to $3 in 2025 from 2024 levels of $2.20. The report also forecasts that natural gas production will increase by 1% in 2025 due to increased production in the Permian and Eagle Ford regions, where natural gas production is primarily associated with oil production. The expected increase in production volumes, customer growth and price improvement will benefit gas distribution companies.
In 2025, earnings from the Utilities sector are expected to improve 8.7% on 5.2% improvement in revenues. (For more details, refer to our weekly Earnings Trends)
Selecting the Utilities
We have used the Zacks Stocks Screener to shortlist two gas distribution utilities with a Zacks Rank #2 (Buy) and beta of less than 1, which indicates lesser stock volatility compared with the broader market. Both gas distribution stocks are expected to continue their strong performance next year.
Both companies have outperformed the Utilities sector in the past six months.
Image Source: Zacks Investment Research
Atmos Energy Corporation is based in Dallas, TX. The company, along with its subsidiaries, is engaged in regulated natural gas distribution and storage business. Atmos Energy has a sturdy capital expenditure plan. The company plans to invest $24 billion in fiscal 2025-2029 to strengthen its operations. The planned investment should result in 6-8% annual earnings growth during the period. The long-term (three to five years) earnings growth is pegged at 7.01%.
The company’s current dividend yield is 2.49%. The company reported an average positive surprise of 3.39% in the last four reported quarters. Earnings estimates for Atomos Energy’s fiscal 2025 and 2026 have increased 0.3% and 0.5%, respectively, in the last 60 days. The stock currently has a Zacks Rank #2 and a beta of 0.7. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
New Jersey Resources Corporation is based in Wall, NJ. The company distributes and stores natural gas. It continues to benefit from its investments in infrastructure, which help it serve its expanding customer base more efficiently. The company expects capital expenditures in the range of $495-$675 million for fiscal 2025. The company’s current dividend yield is 3.87%.
The company reported earnings on par with estimates in the last reported quarter. New Jersey Resources earnings estimates for fiscal 2025 and 2026 have increased 7.3% and 1.3%, respectively, in the last 60 days. The stock currently has a Zacks Rank #2 and has a beta of 0.63.
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