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Utilities have remained a popular investment option for income-seeking investors, as they offer attractive dividend yields backed by stable earnings. Recently, utility companies have been considering scaling down their merchant power generating assets, as forward power prices remain weak, and expand their regulated business operations as they provide more stable and visible income. PPL Corp. (PPL) is a well diversified regulated utility company, which has operations in the U.S. and U.K. More than three quarters of the company's earnings are derived from regulated operations, indicating PPL's earnings stability. The company has been aggressively spending to further expand its regulated operations, which will provide earnings growth in future. Also, the stock remains a good investment prospect for income-seeking investors, as it offers a high dividend yield of 4.7%.

Key Growth Drivers

PPL has diverse geographical operations, which strengthen its power generation portfolio. The company has a highly attractive regulated business in the U.K. Recently, regulators in the U.K. approved multi-year future revenues based on a future business plan, which includes operational and maintenance (O&M) expenditures and capital expenditures (CapEx). The recent approval of future revenues provides earnings visibility for upcoming years. Also, PPL has requested for a fast track option of its business plan with Ofgem, and the decision of the request being expected later this week, on November 22, 2013. The approval of the fast track request will provide additional future earnings visibility and confidence to investors. Last week, during the EEI Conference, PPL's management continued to feel confident with the fast track request's acceptance.

The company's merchant assets (supply segment) continue to face headwinds because of the weak power markets (weak forward power prices) in PJM. In the recent EEI conference, PPL disclosed that it aims to maximize value and to maintain flat earnings in a worst case scenario for the segment. The company also has the option to sell off its merchant assets to strengthen its consolidated earnings. However, I believe that it is an unlikely option in the near term, as valuations remain depressed for the segment and it will lose the possible upside if power markets improve. A recovery in power prices and potential asset sales are important factors that can affect PPL's future earnings; investors should monitor the situation in the challenging power market. As power markets remain weak, the company has anticipated lowering the segment's capital spending.


(Click to enlarge)

Source: Presentation Slides

The most important earnings growth driver for PPL remains its initiatives to expand its regulated operations. The company has been heavily spending to grow its regulated operations, which will fuel its regulated rate base and earnings. PPL has planned to increase the regulated rate base from $21 billion in 2013 to $27.5 billion by 2017; a five year regulatory rate base increase of 7.9%. An important performance metric for a utility company, which allocates capital towards expansion projects, is ROE. PPL has done well allocating its capital towards attractive projects, evident from its ROE expansion from 9.8% in 2009 to 14.3% in 2013. As the company continues to allocate capital towards attractive growth projects, it will increase shareholder wealth and bode well for the stock. The following table shows the increase in ROE for PPL over the years and the chart shows the projected regulated rate base growth.

2009

2010

2011

2012

2013

ROE

9.8%

11%

14.5%

14%

14.3%

Source: Ycharts.com


(Click to enlarge)

Source: Presentation Slides

PPL offers a high dividend yield of 4.7%, supported by its operating free cash flow yield of 15%. The high dividend yield offered by PPL, among its competitors, makes it an attractive stock for income-seeking investors. The company has increased its dividends by 4% on average in the last six years. I believe PPL's solid dividend yield of 4.7% limits any near term stock price downside. The table below shows a dividend yield comparison between PPL and its competitors.

PPL

Duke Energy (DUK)

Consolidated Edison Inc. (ED)

American Electric Power (AEP)

Dividend Yield

4.7%

4.3%

4.2%

4.1%

Source: Yahoo Finance

Final Words

PPL's efforts to expand its regulated operations will fuel future earnings growth and provide more earnings visibility for upcoming years. Also, a favorable outcome of the fast track request, later this week, will boost investor confidence and bode well for the stock price. Moreover, PPL's solid and high dividend yield makes it a good investment prospect for income-seeking investors.

Source: High Dividend Yield Key Highlight Among Benefits Attached To PPL Corp.