- Company on track to completing spin-off of merchant power assets and complete sale of Hydro assets.
- If approved, company’s transmission line project proposal will strengthen regulated operations.
- PPL offers high dividend yield of 4.3% and trades at forward P/E of 14.90x.
PPL Corp. (NYSE:PPL) has been delivering a healthy financial performance in the recent past. PPL, like other utility companies in the U.S., is working to increase its regulated business operations and decrease its merchant power operations. In the U.S., merchant power operations have remained weak and volatile in recent years, which have adversely affected the consolidated performance of utility companies. PPL has announced to spin-off its merchant power operations (supply segment) and increase it regulated capital expenditures, which will portend well for its consolidated financial performance. Also, the company offers a high dividend yield of 4.3%. Moreover, current valuations for PPL remain attractive, as it is trading at a forward P/E of 14.9x, as compared to the utility sector's forward P/E of 16.5x.
Financial Performance and Regulated Operations
The company has been delivering a healthy financial performance; PPL reported an adjusted EPS of $0.53 for 2Q14, beating consensus estimates of $0.49 per share. Also, the adjusted EPS for the quarter was higher than 2Q13's EPS of $0.45. Better-than-expected financial performance for 2Q14 was driven by strong results for the company's Pennsylvania and Kentucky regulated segments and supply segment. Due to the strong performance in 2Q14 and an increase in transmission margins of the Pennsylvania regulated segment, the company increased its full year 2014 ongoing operations EPS guidance range to $2.20-$2.40 from the previous guidance range of $2.15-$2.30 per share.
I believe the company's U.S. regulated operations will fuel its bottom-line growth in the near-to-medium term, whereas EPS growth for international business operations (U.K. segment) is expected to remain relatively flat from 2014 through 2016, mainly due to a higher interest expense and lower expected revenues from the RII0-ED1 decision. Growth for the company's U.S. regulated operations is expected to stay strong from 2014 through 2018, mainly due to expected regulated rate base growth of 6.7%. The company has been increasing its regulated business operations and decreasing its merchant power operations, as merchant power operations remain weak and volatile. In efforts to increase its regulated operations, the company has announced to spin-off its supply business and filed a proposal for a 725-mile transmission line. Also, the company is on track to selling its Montana Hydro asset.
The company is making progress on its spin-off of the PPL Supply segment, which was announced in June. The company expects the spin-off of its merchant power operations to be completed in 1H15. PPL has completed three out of four regulatory filings for the spin-off and the last filing is expected in the fall. The spin-off will allow the company to focus on its regulated business operations, and result in greater revenues and earnings stability. Also, the company is on track to selling its Montana Hydro assets to Northwestern Energy. PPL is selling its Montana Hydro assets for $900 in cash and the sale is expected to complete by 3Q14. The proceeds from the sale of the Hydro assets will be used by PPL to fund the regulated capital expenditure, which will fuel its rate base and EPS growth in the future.
Also, PPL has proposed a 725-mile transmission line to PJM Interconnection. If the new transmission project is approved, it will provide incremental capital expenditure of $4-$6 billion from 2017 onwards. The construction is expected to begin in 2017, and the line is expected to be completed between 2023 and 2025. The project is subject to regulatory approval and a decision is expected by the end of 2014.
The company's earnings growth in coming years is likely to be fueled by capital expenditure, which will result in rate base and EPS growth. PPL's regulated rate base growth is expected to increase from $21.3 billion in 2013 to $29.7 billion in 2018, as shown in the chart below.
Source: Investors Presentation
Along with attractive growth opportunities, driven by regulated capital expenditures, the company offers a high dividend yield of 4.3%. Dividends offered by the company are safe and backed by its healthy cash flows and payout ratio. Also, the company has been consistently increasing dividends. The following table shows annual dividend, payout ratio and dividend coverage for PPL from 2011 till 2013.
Dividend Coverage (Dividend Coverage=OCF/Annual Dividends)
Source: Company Reports and Calculations
PPL has been delivering a healthy financial performance in the past, and the trend is likely to continue as the company has been increasing its regulated operations. The company stays on track to completing the spin-off of its merchant power assets and the complete sale of its Hydro assets. Also, the company's transmission line project proposal, if approved, will strengthen its regulated operations. PPL's regulated capital expenditure will fuel its EPS growth in the future. Moreover, the company offers a high dividend yield of 4.3%, which makes it a good investment option for dividend investors. Furthermore, current valuations for PPL remain attractive, as the stock is trading at a forward P/E of 14.90x, as compared to the utility sector's forward P/E of 16.50x. Due to the aforementioned factors, I am bullish on PPL.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.