Just a few days ago we received a dividend payment from UGI Corporation (UGI) in the amount of $34.73 (23.75 cents X 146.215861 shares). Since we have a DRIP setup, we used this dividend payment to buy about 3/4 of a share more of UGI. The first thing to notice about this payment is that we received a raise of +4.4% this year. Since UGI is a utility company, this lower growth rate seems normal. However when you look at the dividend growth they’ve managed to attain over the past 10 years, this last raise doesn’t look so hot:
Now many investors will become impatient with this slowing dividend growth and start to question UGI’s commitment to growing their dividend. They may point to UGI’s current yield of 2% (which is nearing a 10-year low) and start to look around at other utility companies that pay a higher yield. This sort of thinking contributes to portfolio turnover, something we try to avoid at all costs. If we just look a bit deeper at UGI, we see that they are very capable of increasing their dividend but are investing in growth instead. This growth will increase “earnings per share” which will lower payout ratio and allow them to grow dividends even more in the future. The below diagram shows the “UGI Growth Engine” in action:
We’ll gladly let the company make investments now that will result in higher dividend increases down the road. That’s what running a business properly is all about, otherwise you end up as a company with a high yield and very little dividend growth like AT&T. If we look at the amount of earnings per share paid out in the form of dividends, we see that it sits at around 60%. UGI very well could have given us a bigger increase in our last dividend payment but instead thinks that money is better spent to fuel growth which in turn increases dividend growth in the future. What you’re getting here is the safety of a utility with the rewards of a growth company. This is most evident in UGI’s track record of generating above-average shareholder returns over the past 20 years as seen below:
With that sort of track record we’re happy to hold UGI indefinitely and let them get on with doing what they do best. According to UGI, their “portfolio of growth opportunities has never been stronger”.