The market seems like it is breaking down here a bit as traders anticipate the end of QE2 and the market absorbs what seems to be a decelerating job market. Predictably the breakdown is first occurring in high beta stocks and especially commodities, which had a massive selloff yesterday.
The large cap, blue chip good dividend yielders like Abbott (ABT), Intel (INTC) and Novartis (NVS) that I profiled in an April 13 article have all done well, with Novartis and Intel both gaining approximately 10% since the article ran. I would like to add PPL to this list, as it seems to meet the criteria to head this PAINT Index (PPL, Abbott Labs, Intel, Novartis, and Telefonica (TEF)).
PPL Corporation, through its subsidiaries, generates and markets electricity to approximately 4 million retail, commercial, and industrial customers in the northeastern and western United States and the United Kingdom. It generates energy from various fuel sources, including uranium, coal, natural gas, oil, and water. As of December 31, 2009, the company operated 371 substations with a total capacity of approximately 30 million KVA; 33,053 circuit miles of overhead lines; and 7,310 cable miles of underground conductors in Pennsylvania. Its distribution system in the United Kingdom included 651 substations with a total capacity of 25 million KVA; 28,877 miles of overhead lines; and 23,896 cable miles of underground conductors.
Valuation: PPL sells at 10.5 times this year’s projected earnings and 11.5 times 2012’s consensus. It also yields a robust 5.1% dividend. The stock is in the bottom of its five-year valuation range based on P/E, P/CF, and P/B. It has beat earnings estimate three of the last four quarters, and consensus estimates for 2011 and 2012 have both moved up over the past 60 days.
Value Drivers: The core reason I am advocating PPL is that it is a low beta, safe stock with a solid and sustainable dividend yield. It is a good place to hide as the summer swoon I believe is coming hits the market. It’s beta of 0.45 and yield of over 5% will look very good in that storm.
In addition, it has added some utility assets in Kentucky and lower fuel prices that could result in continued selloffs of energy commodities would help its earnings on the margins. PPL has consistently and steadily increased its dividends over the past five years despite the economic challenges over that period. Finally, the agreed-to acquisition of Central Networks will raise PPL’s exposure to regulated operations and lower the volatility of its earnings further.
Recommendation: Given its low risk, solid cash flow, and a dividend yield of over 5%; I believe the stock deserves to bump off the very bottom of its P/E range. A P/E of 13 seems more appropriate on 2012’s consensus earnings of $2.42 or a little over $31. This would be a 10% bump up from PPL’s current stock price of $27.39. Not exciting, but safe.
Disclosure: I am long ABT, INTC, NVS, TEF.