Otter Tail's Q2 Earnings: Can Dividends Stay Afloat in a Changing Landscape?

Income investors, take note: Otter Tail Corporation (OTTR) has delivered another quarter of mixed results, balancing strong utility growth against headwinds in its manufacturing business. With a 12% dividend hike still on the table and $230 million in cash reserves, this Minnesota-based conglomerate is a classic "dividend darling." But can it sustain its 86-year streak of payouts in the face of rising operational costs, regulatory uncertainty, and a softening manufacturing sector? Let's dig into the numbers.

Electric Utility: Rate Cases and Renewables Are the Lifelines

The crown jewel of Otter Tail's portfolio is its electric utility, serving 134,000 customers across three states. While Q2 earnings here dipped 6% due to harsh weather and lower transmission revenue, management highlighted two critical growth drivers: rate reviews in North Dakota and South Dakota and ambitious solar investments.

North Dakota's Rate Case: Otter Tail filed for a 10.9% revenue increase in late 2023, seeking $23 million more annually. A decision is expected by late 2024. This is a make-or-break moment for the utility's earnings. A favorable outcome could offset softer transmission revenue and support its 7.7% rate base growth target through 2025.

South Dakota's Wind Repowering: The company is repowering four wind farms at a cost of $230 million, boosting capacity by 40 MW. While this project is approved in Minnesota and ND, South Dakota's green light is pending. Delayed approvals or cost overruns here could squeeze margins.

Solar Push: Under Minnesota's Integrated Resource Plan, Otter Tail aims to add 200–300 MW of solar by 2027. This is a strategic move to meet clean energy mandates, but it requires hefty capital investments. Investors should monitor whether these projects stay on budget—and whether they'll be allowed to pass costs to customers.

Manufacturing: Soft Demand vs. Margin Resilience

The Manufacturing segment, which includes BTD and T.O. Plastics, saw earnings jump 15% in Q2—thanks to BTD's steel cost pass-through and inventory sales. But don't pop the champagne yet.

The Downside:
- Plastics Sales: PVC pipe prices are falling, even as sales volumes rose 26% (partly due to a weak 2023 baseline). Distributors are now cutting inventory, which could crimp growth in 2025.
- BTD's Struggles: End markets like lawn/garden and agriculture are slowing. BTD's sales dipped in these sectors, and management warned of further declines in H2 2024.

The Silver Lining:
- Cost Controls: Otter Tail is trimming expenses and shifting production to high-margin products. This could keep margins afloat even if sales volumes drop.
- Capacity Expansion: A $60 million AMI (Advanced Metering Infrastructure) project is on track for 2025 completion, which should cut operating costs long-term.

Dividend Reliability: Can the 12% Hike Survive?

Otter Tail's dividend yield of 2.8% is modest, but its 12% annualized dividend growth over the past decade has been a beacon for income investors. The company reaffirmed its target of 9–11% total shareholder returns (TSR) and no equity needs for five years—a sign of confidence.

But here's the catch: the dividend is heavily reliant on utility earnings stability. If North Dakota's rate case is denied or delayed, or if BTD's sales crater further, cash flow could tighten.

Investment Takeaways: Risks vs. Rewards

Bull Case (Buy):
- Rate cases are approved, solar projects stay on budget, and AMI cuts costs.
- Plastics sales stabilize at elevated levels, and BTD's margins hold.
- OTTR's 62.1% equity layer and $230M cash buffer act as a safety net.

Bear Case (Hold/Sell):
- Regulatory setbacks in ND or SD.
- Manufacturing softness drags on free cash flow.
- Rising interest rates squeeze utility margins.

Final Verdict: A Dividend Stock to Monitor Closely

Otter Tail remains a compelling story for income investors, but it's no longer a “set it and forget it” play. The dividend hike is still achievable, but it hinges on two variables: regulatory approval in North Dakota and manufacturing's ability to stabilize.

For now, the hold rating is justified. Income-focused investors should consider dipping toes in with a small position, but wait for clarity on the rate case before going all-in. A pullback below $60 could present a better entry point—especially if the stock's 50-day moving average holds.

Historically, following earnings call dates since 2022, OTTR demonstrated a 69.23% win rate over 30 days, with a maximum 2.86% return on day 5. This consistency suggests that a buy-and-hold strategy around these events could align with the company's potential to deliver gains over time.

Stay tuned to the August 5 earnings call for more color. This one's a tightrope walk between growth and risk.

Disclaimer: Past performance does not guarantee future results. Always conduct your own research before making investment decisions.