CenterPoint Energy: Impacts Of COVID-19 Are Manageable And Its Strategy To Focus On Utility Is Sound (NYSE:CNP)

Investment Thesis

CenterPoint Energy (CNP) delivered a good Q1 2020 despite unfavorable weather. The company’s Q2 2020 results will be impacted by COVID-19 but should be able to meet its annual EPS guidance thanks to its initiatives to extract savings in its expenses. CenterPoint Energy plans to invest $13 billion of capital expenditures to grow its rate base by about 7.5% annually through 2024. The company currently pays an attractive dividend with a yield of about 3%. The stock is trading at a discount to its historical average and to its peers. Therefore, we believe this is a stock to consider for investors seeking both dividend growth and capital appreciation.

Data by YCharts

Recent Developments: Q1 2020 Highlights

CenterPoint Energy delivered a strong Q1 2020, as the company saw its EPS increased from $0.46 per share in Q1 2019 to $0.60 per share in Q1 2020. The growth was primarily driven by rate relief ($0.06 per share), the merger last year ($0.04 per share), and midstream investments ($0.05), but offset by several smaller factors such as warmer weather and COVID-19.

(Source: Q1 2020 Investor Presentation)

Earnings and Growth Analysis

CenterPoint Energy’s $13 billion of capital investments through 2024 will support its rate base growth

CenterPoint Energy has devised a plan to grow its rate base by investing $13 billion of capital expenditures between 2020 and 2024. While COVID-19 has caused some slight delay in about $0.3 billion of capital projects in 2020, these investments will be deferred to future years (between 2021 and 2024). Management still expects to grow its rate base by about 7.5% annually through 2024. The company’s rate base growth will also support its EPS growth of about 5-7% annually in the next 5 years.

(Source: Investor Update)

COVID-19 pandemic is manageable

The stay-at-home practices that were implemented in CenterPoint Energy’s services territories is expected to negatively impact its Q2 2020 earnings. As can be seen from the table below, commercial and industrial sales have been down significantly across its different segments in April. On the other hand, growth in residential electricity and natural gas consumption is not enough to offset the decline in commercial and industrial sales. Fortunately, management plans to extract cost savings of $40 million annually in its operational and maintenance expenses to mitigate this impact. These savings will be achieved through supply chain savings, the use of work management systems, etc. At this moment, management is still maintaining its annual EPS guidance of $1.10-1.20 per share. This represents growth of about 5-7% from last year.

(Source: Q1 2020 Investor Presentation)

CenterPoint Energy’s transition towards more a utility-focused strategy is beneficial

CenterPoint Energy is in the midst of executing its utility-focused transition. The company plans to have its utility business contributing to about 97% of its total earnings by the end of 2022. This will be significantly higher than the contribution of 70% back in 2018. CenterPoint Energy expects to achieve its goal through a combination of rate base growth (mentioned earlier in the article) and non-core asset sales. The company has recently completed its sale of Miller Pipeline and Minnesota Limited businesses. It is also in the midst of selling its CenterPoint Energy Services. This is beneficial, as the company’s focus on utilities will provide much more stable earnings and improve its outlook. The sale of these non-core assets also helps to improve its balance sheet.

(Source: Investor Update)

An investment grade balance sheet to support its capital projects

CenterPoint Energy has investment grade credit ratings in its business with a healthy consolidated adjusted funds from operations-to-debt ratio of 13.6% (see chart below). The company has recently raised $1.4 billion of capital through equity transaction and does not expect further equity needs through 2022. It also has available liquidity of about $3.1 billion as of May 1, 2020. CenterPoint Energy plans to fund its capital expenditures in the next 2 years through funds generated from operations and debt issuance.

(Source: Q1 2020 Investor Presentation)

Valuation Analysis

CenterPoint Energy is currently trading at a forward P/E ratio of 15.12x. This is below its 5-year average of 17.80x. Its forward P/E ratio of 15.12x is also below WEC Energy’s (WEC) 25.08x, Ameren Corp.’s (AEE) 23.08x, and Entergy Corp.’s (ETR) 18.52x. It appears that CenterPoint Energy is trading at a discount, as the market has not yet priced in its utility-focused strategy.

Chart

Data by YCharts

A 3%-yielding dividend

CenterPoint Energy has recently reduced its dividend by about 48% to meet its target payout ratio of 50-55%. We think this is a wise move, as the company is in the midst of transitioning to a utility-focused business model. The sale of its non-core assets will result in lower funds from operations. Hence, a dividend cut will help improve its payout ratio. The company currently pays a quarterly dividend of $0.15 per share. This represents an annualized dividend yield of 3%.

Risks and Challenges

CenterPoint Energy faces several risks:

(1) Unfavorable regulatory environment could result in lower allowed return on equity.

(2) Adverse weather condition will impact the demand of natural gas and electricity.

(3) Multiple waves of pandemic may result in lower-than-expected energy consumption, especially if another lockdown is introduced in its services territories.

Investor Takeaway

We like CenterPoint Energy’s strategy to focus on its utility business. It also has a sound capital plan to grow its rate base and EPS in the next 5 years. This should result in dividend growth in the future. Therefore, we think this is a stock worth considering for investors seeking both dividend growth and capital appreciation.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.

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