Gabelli Likes the Dividend at National Fuel Gas (NFG)

Mario Gabelli is a world famous value investor, who founded GAMCO in 1977, a $30 billion asset management firm based in New York. Forbes magazine ranks him in the top 1000 wealthiest people in the world with a net worth of about $1 billion. Gabelli is a leading proponent of the Graham-Dodd school of value investing, and pioneered the application of Graham and Dodd's principles to a number of niche areas in a very wide range of industries.

According to an article in Fortune, Gabelli recently bought 800,000 shares of utility National Fuel Gas (NFG). The gas company pays a dividend of 2.76%, which is below the Natural Gas Utilities industry average of 4.48% but is in-line with the S&P 500's yield. The company has a market capitalization of about $4 billion.

Gabelli is very interested in the company and as he believes it is very undervalued. The dividend payout in 2008 was only 39%, which is very low for a utility, but exceeded 100% in 2009 when earnings fell by some 60%. Clearly, both Gabelli and the company’s board of directors feel this is a temporary setback. As such, there is scope for dividends to increase in the very near future and the payout ratio could move more in line with peers. Competitors Enterprise Products Partners (EPD) and TransCanada Corporation (TRP) both have payouts that are much higher.

Gabelli likes National Fuel Gas (NFG) for five reasons:

First, the company is a steady utility. "We came at National Fuel Gas (NFG) with the intention of buying it for our utilities fund, so that's how we hit upon it," says Gabelli. “NFG's utility produces a dependable earnings stream with a high return on equity”, he adds. He also likes the company's dividend, which has been rising for 39 years. The yield is now 2.5%.

Secondly, National Fuel Gas (NFG) is a gas player. "About 70 years ago, National Fuel Gas (NFG) decided, Let's figure out how we can get closer to our gas supply," says Gabelli. "So they bought a million acres in Pennsylvania and New York, and they paid almost nothing for the land." That land now sits on top of the Marcellus Shale.

Third, Gabelli believes that natural gas prices will revive. "With the economy improving, we think natural gas is undervalued," he says. "If you can extract natural gas from a politically safe area like Marcellus and get it to the customer, that's a big opportunity," he says.

Fourth, National Fuel Gas’s (NFG) stock is undervalued. "The way we see it, the utility is worth roughly $20 a share," says Gabelli. "The pipeline business is worth $15 a share, proven reserves are $15 a share, and timber is $2. So that adds up to $52, which is where it's trading at now; take out the debt and you're at $42. National Fuel Gas (NFG) fell under the radar screen for utility analysts, who didn't fully see the potential. But it became apparent to me that it was a technology-driven asset play. For value investors like myself, that's very attractive."

Fifth, there’s a potential catalyst. "We think they could take their exploration and production business, Seneca, and offer a piece of it to the public in order to raise capital. In doing so, they would identify to the world what they own. There's been a lot of interest, what with Exxon buying XTO, and Atlas cutting a deal with a company in India. Entities are paying significant dollars to get in the shale, which validates our premise," Gabelli says.

While National Fuel Gas (NFG) is not a top yielding dividend stock right now, it has the potential to reward the patient long-term investor with much larger payouts in the future. Without even considering the potential for capital appreciation, the catalysts outlined should provide more than enough cash flow for the company to produce higher payouts in the future – and this according to Mario Gabelli.

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