Carl Icahn is one of the most famous activist investors on Wall Street. He's known for investing in companies with the goal of unlocking value for himself and other shareholders. Today he owns around 15% of Southwest Gas (SWX 0.14%) via his Icahn Enterprises (IEP -1.14%) investment vehicle. Should you invest in Southwest Gas, too? It depends.
A quick look at Southwest Gas and Icahn Enterprises
Icahn Enterprises owns or effectively owns some companies, meaning it has total control of the entities. An example of this is CVR Energy (NYSE: CVI), which the company treats as an operating subsidiary because it owns a controlling stake (66% of the shares) in the still publicly traded company. But it has also invested in a portfolio of five stocks, in which it owns only part of the public companies. The investment in which it has the largest ownership stake is Southwest Gas, at a bit over 15%. The other holdings are IFF, American Electric Power, Bausch Health, and Illumina. None of the other positions it has crosses the 10% threshold, with three of the four under 2%.
Image source: Getty Images.
That means that Icahn has, by far, the most say at Southwest Gas among his non-controlled stakes. Icahn is an activist investor, which generally means he likes to buy companies where he believes changes can be made to unlock value for shareholders like himself. And, as a large shareholder, he pushes for those changes.
Southwest Gas describes itself as a business that purchases, distributes, and transports natural gas. It has around 2 million utility customers in parts of Arizona, Nevada, and California. It also provides infrastructure services across North America through its controlling stake in Centuri Holdings (more on this below). So, as currently configured, it is a mix of a regulated natural gas utility and an infrastructure services company.
Southwest Gas' big change
Southwest Gas won't look the way it does today for very long. It is working on the complete separation of Centuri Holdings. It has already held an initial public offering for a portion of Centuri Holdings, with Icahn Enterprises buying a substantial number of the shares. According to Southwest Gas:
SWX retained ~81% interest in Centuri Holdings stock. Centuri's market capitalization was valued at $2.21 billion as of 5/7/20241. We expect to consolidate Centuri until conditions for consolidation are no longer met.
That basically suggests that Southwest Gas will sell shares of Centuri over time (though it could also just distribute Centuri shares to Southwest Gas shareholders) to raise capital for its own capital investment needs. And it's definitely possible the company will need those resources to expand its business given that it expects population growth of 3.5% between 2024 and 2029 in the regions it serves of Arizona and 2.6% in Nevada, relative to 2.4% population growth throughout the rest of the country. Regulated utilities are given monopolies in the regions they serve, but must get rates and capital investments approved by the government.
It looks like Southwest Gas's unlocked value is freeing up the value that was essentially locked in Centuri. But is that enough to make the stock a buy?
Although Arizona and Nevada have encouraging population growth projections, California hasn't been growing as quickly as the rest of the country. So, overall, the customer count at Southwest Gas is expected to increase 1.6% per year through 2026. That's not terrible, but it isn't nearly as exciting as the 3.5% population growth figure the company highlights for Arizona. Basically, slow and steady is likely to be the case here for the foreseeable future. That's what you would expect from a utility, but that doesn't make Southwest Gas stand out.
As for the stock itself, the yield is currently around 3.2%, which is just in line with the average utility, using Vanguard Utilities Index ETF as a proxy. Meanwhile, Southwest Gas' dividend has been boosted annually for 17 years, but it hasn't actually been increased since Q2 2022. If the company doesn't raise the dividend in the fourth quarter of 2024, the annual streak will end.
But that's not the real story. The company states that, "Upon completion of the separation of Centuri, Southwest Gas Holdings plans to target a dividend payout ratio in line with gas utility peers." That suggests that there's a dividend cut coming at some point in the near future.
Probably better off with a diversified utility ETF
If you are looking for a utility stock to add to your portfolio, you will probably be better off avoiding the complexity of Southwest Gas today. There are a lot of moving parts as Carl Icahn pushes for change. It isn't yet clear where all the pieces will fall, but Southwest Gas is hinting that a dividend cut is on the way. As such, income-focused investors should be particularly careful here. Basically, only more aggressive investors that want to take on a special situation stock should be looking at Southwest Gas right now. More conservative investors might want to consider a utility with a less complicated story or a diversified utility ETF like Vanguard Utilities Index ETF.
