Infrastructure

Why Sempra Energy's Stock and Dividend May Be Headed Much Higher in 2021

Some companies are better at changing their business models than others, including in the field of utilities and energy infrastructure. Sempra Energy (NYSE: SRE) is proving that it may be better at changing its operations that its competitors are.

After selling its assets in Chile for a cash total of about $2.2 billion, Sempra now is focused on a mission of becoming “North America’s premier energy infrastructure company.” The San Diego-based utility holding company had a total of over $60 billion in assets at the end of 2019, and it delivers energy to over 35 million consumers.

After closing the Chilean sale and with a sale in Peru, Sempra has brought in a combined $5.8 billion. Multiple research reports have positive views on Sempra. Some of those reports were even ahead of it raising its full-year earnings guidance range to $7.20 to $7.80 per share. Its prior range had been $6.70 to $7.50 per share.

While analysts and investors alike may have some optimism here, one outcome that seems pretty evident after looking through the plans and outlook is that Sempra wants to generate higher returns for its investors. That would not just be earnings-related, but higher valuations, higher dividends and what it hopes will be a higher stock price out into 2021 after the recession dust settles.

Morningstar maintained its $125 per share fair value estimate and noted stable and narrow moat ratings. This report suggested that Sempra’s all-in asset divestitures have brought in about $8.3 billion in total proceeds and will help fund its five-year capital investment program that is slated to be $32 billion. Morningstar no longer expects a slight shift of capital from 2020 into 2021, and the company previously indicated its capital projects in California and Texas remain on track.

With the transition toward renewable energy and carbon reduction, Morningstar believes that the allocation of capital away from noncore assets and toward its defensible North American infrastructure business has served and will continue to serve investors well.

on July 1, Zacks called Sempra an attractive dividend play and said that it was rated as a Buy.

On June 15, Seaport Global Securities issued a new Buy rating and a $142 price target.

BofA Securities issued a new Buy rating and a $135 price objective back on June 12, but things had been quiet on the upgrades and downgrades for a while before that.

Sempra has a $35 billion market cap, and despite the recession, the Refinitiv consensus estimates still call for growth. After $6.78 in earnings per share in 2019, Refintiv’s consensus estimates are $7.35 per share for 2020 and $7.92 for 2021. That is low-to-mid single-digit percentage revenue gains, but those revenues of $10.8 billion in 2019 are expected to rise to $11.5 billion in 2021.

With a dividend yield of better than 3.5%, Sempra has a history of raising dividends. One exception was during the Great Recession, when Sempra kept its dividend static. Sempra currently pays out less than 60% of its expected 2020 earnings, so investors will have to make sure that its new higher guidance can be achieved before making any bold predictions about a dividend hike.

Sempra operates San Diego Gas & Electric and Southern California Gas, and it has the Sempra Texas Utilities segment, which is a regulated transmission and distribution electricity outfit, along with its Sempra Mexico operations. Sempra’s valuation is not exactly off the charts at 16 times the midpoint of its expected earnings per share range.

Before the economic meltdown, Sempra stock was trading above $160 a share. It briefly dipped under $100 at the selling panic peak in March, and the shares recovered to roughly $121 now. Sempra had a consensus target price of $143.47 on last look.