How Spark Infrastructure Group fits a dividend seeker’s portfolio

Spark Infrastructure Group’s (ASX: SKI) stapled securities are up 31% since the start of the year, despite persistent global headwinds in the form of an Australian Federal election, a Brexit, and proposed U.S. interest rate rises. To put Spark’s performance in context, the S&P/ASX 200 Index (ASX: XJO) fell by 1.3% over the same period (though the index increased for periods of time in between).

Spark’s outperformance demonstrates its resilient business profile making it akin to a defensive stock and earning it a place in any long-term investor’s portfolio in my opinion. Here is why.

About Spark

Like listed peers APA Group (ASX: APA), Ausnet Services  (ASX: AST) and DUET Group (ASX: DUE), Spark is a stapled security investing in regulated utility infrastructure assets in Australia and abroad.

According to its website, Spark’s current portfolio primarily consists of a 49% stake in three separate Australian electricity distribution networks: CitiPower, Powercor and SA Power Networks. In addition, Spark owns a 15.01% interest in TransGrid (owner of the NSW high voltage electricity network) and, until recently, a 10.6% equity investment in DUET Group.

DUET divestment

Spark recently divested 8% of its investment in DUET Group, citing DUET’s surging share price as a reasonable time to exit the investment. Pleasingly, management used the proceeds to reduce net debt and facilitate Spark’s investment in TransGrid.

Although debt levels remain elevated (compared to other industrial stocks), the repayment allows Spark to fall within its targeted 75% debt to Regulated Asset Base ratio, providing it with breathing room should regulated electricity prices decline.

Company financials

The nature of Spark’s industry means its earnings remain robust through periods of economic uncertainty. As a provider of essential services (i.e. electricity), Spark is able to predict future earnings with relative accuracy, as they vary only when usage volumes increase or decrease. This, in turn, positions it to conservatively predict cash flows (which is why it can take on higher debt loads).

In its most recent update, net profit after tax was down 31.3% to $88 million due to a one-off decrease in the equity accounted value of its investment in SA Power. Operating cash flows increased 0.2% allowing the group to pay a cash distribution of 6 cents per share for the second half of 2015, taking the distribution to 12 cents per security for the full year.

In June management upped distribution and earnings guidance for the next three years, stating it intends to pay at least 12.5 cents, 13 cents and 13.5 cents in each of FY2016, FY2017 and FY2018 respectively. This places it on a forecast yield of 5.4% in 2018 at current prices and represents compound growth of 5% per annum. (I daresay many stocks on the market can guarantee that).

Foolish takeaway

Investors may be wary of Spark and other utility investments because of their high gearing ratios. However, the fact is that utility companies can maintain higher levels of debt given their relatively consistent earnings and predictable cash flows.

Accordingly, although usage volumes may impact future earnings, I expect Spark to remain a perennial performer deserving a place in any long-term portfolio.

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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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