I am bullish on PPL Corp. (NYSE:PPL) due to its significant and growing exposure to regulated operations. The company's regulated operations are likely to provide 5% long-term earnings growth. Also, the stock currently offers a solid dividend yield of 5%, backed by earnings and cash flows of its regulated operations. Also, the company has been reducing its exposure to unregulated business due to weak commodity prices, which I believe will result in multiple (valuation) expansion. PPL's capital spending profile remains robust for the coming years, which will offer rate base growth, portending well for the stock price. Therefore, I am bullish on the stock and believe, due to its solid dividends, it remains an attractive investment option for dividend investors.
The company reported healthy financial results for Q4 2013. PPL reported ongoing earnings of $0.60 per share, beating consensus estimates of $0.51 per share, up from $0.49 in the corresponding period last year. PPL's supply (unregulated) business is struggling to post a decent performance due to weak commodity prices, which also took a toll on the quarterly revenues, as total revenues for the company fell 11% year-on-year to $2.8 billion in Q4 2013. Earnings for the recent fourth quarter were driven by healthy performance of its different reporting business segments.
PPL's full year 2013 financial performance also remained strong. Annual earnings per share grew to $2.45 in 2013, up from $2.42 in 2012, beating the consensus estimates of $2.35. The following table shows earnings growth for different reporting segments of PPL for Q4 2013 and full year 2013.
4Q2013 (Year-on-year growth)
Full Year-2013 (Year-on-year growth)
Source: Company Report and Calculations
The company has been directing its Capex towards regulated operations, which will provide earnings and cash flow stability to PPL. In efforts to expand its regulated operations, the company has been aggressively directing Capex towards regulated operations; in 2013, the company incurred Capex of approximately $4.20 billion. Also, for the coming years, the capital expenditure forecast for PPL remains robust, which will fuel earnings growth through rate cases approvals. The Capex that PPL has been incurring is likely to be recovered with very little regulatory lag. In the recent quarter's earnings call, the company updated its Capex forecast by including $650 million of additional transmission spending through 2018. The company expects a consolidated rate base growth of 6.7% for the next five years. The following graph shows the forecasted regulated rate base growth for PPL.
(click to enlarge)
Source: Investor Presentation
Due to weak commodity prices, PPL's supply segment is going through difficult times. The company is considering to ramp up its cost control efforts for the segment in efforts to support the segment's bottom line results. Also, the company has the option to spin off its Supply (unregulated) business. PPL's Supply segment is expected to break even beginning in 2015. If the market conditions for unregulated generation remain weak, I believe the management might opt for the spin-off. The market is currently assigning no value to Supply generation assets, using the P/E approach to value the company, as 2015 earnings are expected to break even. I believe the spin-off of unregulated assets and expansion of regulated operations will portend well for the stock price, as cash flows and earnings stability will increase.
PPL's stock remains an attractive investment option for dividend-seeking investors, as it offers a solid dividend yield of 5%. Moreover, the company has been consistently increasing its dividends. Recently, the company announced a dividend increase of 1.4% to annual dividend of $1.49 per share, the 12th dividend increase in the last 13 years. As the company's earnings are likely to grow as a result of Capex in coming years, dividends offered by the company will also increase. The following chart shows the EPS and dividends for the company.
(click to enlarge)
Source: Investor Presentation
Furthermore, since getting shortlisted for a 'fast track' status in November last year, the company is awaiting for the final determination of the fast track, which is expected by the end of February 2014. Also, next week, Ofgem is expected to announce its decision on the cost of equity review. A constructive outcome of the final determination for the fast track status and the cost of equity review will portend well for the stock price.
I believe PPL remains a good investment option for dividend-seeking investors, as the stock offers a sustainable dividend. Also, the growing regulated operations provide more cash flows and earnings certainty and visibility, which will result in multiple expansion for PPL. Moreover, a robust capital expenditure profile and the spin-off option available with the company for its Supply segment support my bullish stance on the stock.