MDU has had some delays in construction projects, specifically in the public sector, because of Covid-19. However, the FAST Act evidently has been extended by another year. It should maintain highway funding.

Infrastructure Spending

Among the pending Biden administration’s most publicized cabinet nominees is Pete Buttigieg, who in a recent interview commented on the likelihood of a future infrastructure bill. Asphalt required for such projects, or related materials known as aggregates, are heavy and excessively costly to transport. Therefore, there is reason to suspect future business for MDU in the early years of this decade. Indeed, it is investing in synthetic aggregates and recently purchased a company that owns 100 million tons throughout central Wyoming.

Coal

Coal is not something to invest in, however. The federal government aims to reduce emissions and all indications are that environmental policy has priority. Coal is the easiest target. Here is a description of a relevant agreement that involves MDU.

Fuel Contract: Coyote Station entered into a coal supply agreement with Coyote Creek that provides for the purchase of coal necessary to supply the coal requirements of the Coyote Station for the period May 2016 through December 2040. Coal purchased under the coal supply agreement is reflected in inventories on the Consolidated Balance Sheets and is recovered from customers as a component of electric fuel and purchased power.

…At September 30, 2020, the Company’s exposure to loss as a result of the Company’s involvement…based on the Company’s ownership percentage…was $34.2 million.

Other concerns may include the expense, and ability, to supply energy to customers.

Dividends

Aside from that, the company did just increase its dividend, from $0.2075 to $0.2125 quarterly, or $0.83 to $0.85 per year. It is a sign that fiscal results are stable or poised to improve. The corporation has consistently increased its dividend since as far back as 1990, when it paid $0.2804 per year.

However, if using a dividend discount model to project how the market is valuing MDU with regard to it as a future source of income, it is evident that the current $25.71 share price is high. It would be above $12.16 and below $14.20 if anticipating the dividend to grow at the same rate as its most recent 2.41% increase, unless a 3% lower risk-adjusted return on the stock market’s 11.5% over the past 10 years; at 5.99%, as compared to 8.99%; is assumed.

There are other ways to value stocks (such as EV / EBITDA, particularly with aggregates). The company should earn nearly $2.00 per share in the year that is soon concluded, in light of its guidance. Thus, if shares are ever available at $24, 12x earnings really could be a worthwhile deal. However valuation is performed, at least $34.2 million might be adjusted for risk that results from exposure to coal. With over 200 million shares outstanding, its market capitalization is about $5.5 billion, and it has $3 billion in shareholders equity, so relatively speaking $34.2 million is not that much.

Still, there is reason to suspect that the company has near-term problems. When and if it counteracts or otherwise deals with them, there are subsequent prospects if a new transportation bill is passed. They may coincide with wide availability of better medical solutions for the COVID-19 pandemic. Shares might trade at a higher multiple on increased earnings, perhaps 20x.

Stars could align for MDU in 2021. The stock is already inexpensive on reasonable estimates of current year earnings, though it might be worth about half the market’s price for it in light of perpetual dividend growth. A key question is whether coal is a bigger corporate issue than any federal spending on infrastructure.

*** the author may invest in MDU Resources, 1/9/21 at a price closer to $23.