Stock Analysis & Ideas

Seeking Predictable Dividend Growth? This Superb Stock Fits the Bill

Story Highlights

ONE Gas is a utility company with strong earnings growth catalysts and low-volatility characteristics. The company has a robust distribution network and enjoys fixed charges and predictable rate increases. This results in accurate projections regarding its medium-term net income and dividend growth.

ONE Gas (NYSE: OGS) is a dividend-growth powerhouse in a highly-uncertain environment. With its investment case offering predictable and tangible returns, the stock should stand out to investors searching for growing income over time with little to no uncertainty.

Accordingly, I remain bullish on the stock.

Why Does ONE Gas Stock Stand Out?

ONE Gas’ investment case stands out these days because it’s quite hard to find companies that offer limited risk and predictable dividend-growth prospects.

Take real estate, for instance, which has traditionally been a preferable choice for dividend growth. The retail and office markets are struggling, while the residential market is unwinding from the buying frenzy that took place over the past couple of years. The rise in interest rates doesn’t help, either.

Other sectors, like the consumer staples sector, also used to feature safer, dividend-growing options, but inflation has been putting pressure on the profits of these companies. Further, most are overvalued as investors flock to them.

Then, there is the utilities sector, whose constituents have historically paid reliable dividends. However, there are little to no names in there that can make anybody other than very conservative investors excited, as the sector’s growth prospects are quite limited.

ONE Gas (NYSE: OGS), however, is a utility that stands out both in this field and among most stocks in the dividend-growth universe, as it offers both exceptional dividend-growth potential and low-volatility characteristics.

How ONE Gas’ Has Predictable Earnings Growth

To understand ONE Gas’ dividend-growth potential, you need to understand its earnings-growth potential, which is backed by its wide moat, business model, and predictable rate hikes as approved by regulators.

ONE Gas’ Moat

ONE Gas has a strong distribution network that has enabled it to acquire a significant portion of the market in the regions it operates in. It is the leading natural gas distributor in Kansas and Oklahoma and the third-largest in Texas.

Specifically, ONE Gas holds a market share of 72% in Kansas, 88% in Oklahoma, and 13% in Texas, in terms of the number of customers. This extensive market presence in two out of the three states it operates in gives the company a wide moat and a competitive advantage.

Therefore, ONE Gas is set to generate predictable sales as long as the demand for natural gas remains strong. Let’s talk about that now.

How OGS Can Weather Falling Natural Gas Prices

Natural gas prices have plunged lately as warmer-than-expected temperatures eased concerns over shortages and the need for gas rationing. However, this doesn’t necessarily negatively affect ONE Gas. ONE Gas is a natural gas distributor. The company has therefore fixed charges in place that do not fluctuate based on customer usage in each period.

Additionally, the company utilizes weather normalization mechanisms designed to adjust the delivery charge component of customers’ bills for the additional/lower volumes used when actual Heating Degree Days (HDDs) exceed/fall short of normalized HDDs.

Thus, the company’s revenues are not easily swayed based on sudden jumps/falls in the demand/consumption of natural gas.

ONE Gas Can Predictably Hike Rates

The pricing of ONE Gas’s distribution services is determined by regulatory bodies in each state, which aims to ensure that utility companies are able to earn a reasonable return on their investment. Due to these predictable rate increases, ONE Gas has been able to provide highly-accurate projections for its medium-term net income and dividend growth.

In particular, management expects that there will be base rate increases of 7% – 9% through 2027. These rate increases, combined with a growing customer base, consistent natural gas consumption patterns, and predetermined capital expenditure requirements, are expected to result in an annual increase in net income of 7% – 9% over the same period.

Predictable Earnings Growth Leads to Predictable Dividend Growth

ONE Gas’ moat, distribution business model, and upcoming rate hikes ensure a predictable earnings growth road map. Accordingly, the company’s management is able to provide a similar outlook for dividend growth since they can accurately forecast narrow earnings-per-share growth.

As a result, management expects ONE Gas’ dividend rate to increase by mid-single-digits through 2027, which should strengthen investor confidence in the stock.

For context, ONE Gas has increased its dividend for eight constitutive years at a five-year CAGR of about 8%. The stock’s yield currently stands at about 3.2%.

Is OGS Stock a Buy, According to Analysts?

As far as Wall Street’s view on ONE Gas goes, the stock has a Hold consensus rating based on one Buy, four Holds, and one Sell assigned in the past three months. At $75.83, the average ONE Gas stock price target suggests 4.7% downside potential.

The Takeaway

Apparently, Wall Street isn’t that all excited about ONE Gas’ investment case. However, this doesn’t change the fact that the predictable features attached to the company are quite remarkable.

In my research, I rarely come across companies that offer such specific and narrow outlooks that cover more than a couple of years. ONE Gas is one of the few companies that I have found to be reliable in predicting its medium-term return potential. This is what makes ONE Gas stand out as an appealing low-volatility dividend-growth stock.


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