Dividend Growth Stock Overview: MGE Energy Inc.

MGE Energy serves portions of Wisconsin, including the capital, Madison.
Photo courtesy Jordan Richmond/flickr.com.

About MGE Energy

MGE Energy is a utility company providing electric and natural gas service to nearly 300,000 customers across parts of Wisconsin, including the capital of Madison. MGE Energy assets include 885 miles of overhead electric distribution lines and over 2,600 miles of gas distribution mains. The company conducts much of its operations through multiple subsidiaries, including MGE (Madison Gas and Electric), MGE Power Elm Road, and MGE Transco Investment LLC. The company has its headquarters in Madison and employs nearly 700 people.

(Note: For purposes of this article, when referring to the publicly traded company, I will use the term MGE Energy. Where I use the term “MGE”, I’m referring to the subsidiary.)

MGE Energy reports its results in five distinct business segments: Regulated Electric Utility Operations, Regulated Gas Utility Operations, Non-regulated Energy Operations, Transmission Investments, and “Other”.

The Regulated Electric Utility Operations segment is responsible for generating, purchasing and distributing electricity through MGE Energy’s wholly owned subsidiary MGE. The segment serves over 140,000 customers, 86% of whom are residential customers; the remainder are commercial or industrial customers. The segment generated slightly more than half of MGE Energy’s total net income in 2014.

The Regulated Gas Utility Operations segment purchases, transports and distributes natural gas to nearly 150,000 customers in 7 Wisconsin counties. Like the Electric Utility Operations segment, the ratio of residential to commercial/industrial customers is 8:1. The segment generated about 20% of MGE Energy’s 2014 net income.

The Non-regulated Energy Operations segment controls two MGE Energy subsidiaries: MGE Power Elm Road, LLC and MGE Power West Campus, LLC. MGE Power Elm Road owns an 8.33% interest in two coal-fired generating units and MGE Power West Campus owns a controlling interest in a cogeneration facility on the campus of the University of Wisconsin. Both subsidiaries lease their shares of the assets to MGE for its electricity supply needs. 24% of MGE Energy’s 2014 net income was generated by this segment.

The Transmission Investments segment controls MGE Energy’s investment in American Transmission Company LLC. MGE Transco Investment LLC (a subsidiary of MGE Energy) owns 3.6% of American Transmission. Earnings generated by this segment reflect MGE Energy’s share of American Transmission’s earnings. Finally, the “Other” Segment includes subsidiaries that are responsible for investing in companies and property that support the regulated operations of the other segments, and that assist businesses expand within central Wisconsin.

In 2014, MGE Energy earned $80.3 million on revenues of $619.9 million. These figures were up 7.2% and 4.9%, respectively. The bulk of the income growth came from a decrease in Electric Utility segment expenses. Net income from the Gas Utility segment was up 4.8% due to a colder winter as compared to 2013. Earnings per share were up 7.4% to $2.32, giving MGE Energy a payout ratio of 50.9% based on the annualized dividend of $1.18 per share.

The long-term debt to equity ratio decreased in 2014 to 37.5% from 39.5% in 2013, due to a nearly 7% increase in shareholders’ equity.

The company’s earnings are driven heavily by seasonal weather. With a return to more normal temperatures in 2015 (the winter of 2014 was unusually cold in MGE Energy’s operating area), the company’s earnings were down 34% in the 1st quarter and flat in the 2nd quarter. Combined earnings in the 1st half of 2015 were 92 cents a share, down 24% from $1.21 in the 1st half of 2014.

The company has a share repurchase program to support the direct share and dividend reinvestment programs, but not to specifically reduce the number of outstanding shares.

The company is a member of the Russell 2000 index and trades under the ticker symbol MGEE.

MGE Energy’s Dividend and Stock Split History

MGE Energy Dividend Growth

MGEE has compounded its dividend at about 3% since 2010.

MGE Energy began increasing dividends in 1977. The company announces dividend increases in mid-August and the stock goes ex-dividend at the end of August. In August 2015, MGE Energy announced a 4.4% increase to an annualized rate of $1.18. I expect MGE Energy to announce its 40th year of dividend increases in August 2016.

Like most utilities, MGE Energy increases its dividends very slowly, with annual increases in the low-to-mid single digit percentages. Over the last 5 years, the company has compounded its dividend at a rate of 3.1%. The dividend growth is slower over the long-term, with 20-year and 25-year annual compound rates of roughly 1.6%.

MGE Energy has split its stock 3 times in the last quarter century, each time 3-for-2. The stock split in January 1992, February 1996 and, most recently, in February 2014. A single share purchased prior to the first stock split would now be 3.375 shares.

Over the 5 years ending on December 31, 2014, MGE Energy Inc. stock appreciated at an annualized rate of 17.72%, from a split-adjusted $19.90 to $44.99. This outperformed both the 13.0% compounded return of the S&P 500 index and the 14.0% compounded return of the Russell 2000 Small Cap index over the same period.

MGE Energy’s Direct Purchase and Dividend Reinvestment Plans

MGE Energy Inc. has both direct purchase and dividend reinvestment plans. You do not need to already be an investor in MGE Energy to participate in the plans. For new investors, the minimum initial investment is $250 or $25 if you sign up for 12 months of automatic investments. Follow on direct investments have a minimum of $25. The dividend reinvestment plan allows full or partial reinvestment of dividends.

The plans’ fee structures are somewhat favorable for investors – the company picks up the transaction fee for purchases, but you’ll be assessed brokerage commissions on shares purchased on the open market. (There is no brokerage commission for shares purchased directly from the company.) When you go to sell your shares, you’ll pay a transaction fee of $15 plus the applicable brokerage commission. All fees will be deducted from the sales proceeds.

Helpful Links

MGE Energy’s Investor Relations Website

Current quote and financial summary for MGE Energy (finviz.com)

Information on the direct purchase and dividend reinvestment plans for MGE Energy

 

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