PPL Predicts 5-6% EPS Growth With Continued Dividend Increases

Summary

• Thanks to PPL's use of coal-fired plants, their gross margin has been increasing.
• While the UK situation is ongoing, the company's UK division is a top-performer among other UK utilities, giving PPL negotiating leverage.
• Kentucky regulators have granted rate hikes.

I originally wrote about PPL here. If you'd like to get a bit more background on the current macroeconomic backdrop for utilities, please see this link.

Key news from their latest 10-K:

• LG&E's rate request, which was filed with the Kentucky authorities, was approved in June of last year. Kentucky approved an increase of 5.2% and 2.1% for LG&E's electric and gas segments, respectively. KU was granted a 3.2% hike in their electricity operations.
• In January, the Kentucky authorities asked PPL to submit a plan to distribute tax savings from the Tax Cuts and Jobs Act to Kentucky consumers. PPL has until March 9 to respond.
• The company filed their annual power transmission modification with FERC in June of last year.
• The company was granted a modest increase in their depreciation related to their asset retirement program. This will add $245 million to the company's bottom line.

Regarding the company's UK operations, these two paragraphs from the latest earnings call summarize the company's situation [emphasis added]:

And in the UK, WPD remains on track to achieve its 2017-2018 performance incentive targets, which include reliability and customer satisfaction metrics, with its four distribution network operators maintaining the top four spots for customer satisfaction among all the UK DNOs. This is a testament that the capital dollars we are spending across all three of our business lines are providing real value for customers.
.....
Regarding RIIO-ED2, we believe it's far too early to predict any outcomes, as the rules have not yet been developed by Ofgem. However, with Ofgem's statements that the best performing companies should still be able to earn double-digit returns and that they want to drive more differentiation between the best and worst performing DNOs, we believe WPD is very well positioned to succeed in that type of regulatory construct in RIIO-ED2. Ofgem expects to consult with stakeholders in early 2018 on the proposed structure for the broader RIIO-2 framework. WPD and PPL will have an opportunity to share our views with Ofgem during this phase, similar to prior price control reviews.

The situation is "fluid." However, PPL's UK division has distinguished itself based on criteria specifically outlined by the UK regulator, giving them an advantage in rate negotiations. While there is no guarantee those criteria won't change or be altered, PPL is staking out their position in an appropriate manner.

Let's turn to the relevant financial information from their annual report:

Like a number of other utilities, PPL has seen a decrease in their revenue over the last few years, which is due to demand stabilizing for most of this expansion. However, their gross margin has increased substantially due to their reliance on coal-fired power generation:

The price of coal has dropped significantly since 2008, which has been slowly reflected in PPL's long-term contracts:

Thanks to increasing depreciation deductions, their operating margin has increased over the last five years. They're generating sufficient EBIT to manage their interest payments and their debt/asset ratio is contained. Finally, their dividend payout ratio is below 100, which should please income investors.

The company remains committed to their dividend-oriented investors:

We still expect to grow earnings per share by 5% to 6% through 2020 off of our new 2018 base year. Our updated plan reflects higher projected 2020 earnings per share compared to our previous estimate, despite the effects of tax reform. We're committed to continued dividend growth. And today, we announced a 4% increase in the dividend, consistent with our prior expectations.

Overall, PPL remains an attractive dividend stock.

This post is not an offer to buy or sell this security. It is also not specific investment advice for a recommendation for any specific person. Please see our disclaimer for additional information.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[subaruguy]

PPL goes ex div 3/8/2018, I picked up shares at $29 and to go long PPL ! good luck

[Realto]

I sold a couple Jan$25 puts this am, with a premium of >7%APY. Nothing like Brexit/Fed rate/dilution/volitility fears to generate put income. And near a 6% yield if I do pick up shares, which I doubt. The lights and pensioners dividends are not going out.

[steven_perch]

What price did you get for selling the Jan$25 put options? Looks like the premium is presently < 6% net yield in about 10-months. I think options premiums are taxed as short-term gains.

[Realto]

steven- I got $150 for each Jan$25 cash secured put contract. So that's just shy of 7%APY with the commision factored in. I have Oct put also, so I was thinking the Oct exp. date instead of Jan. In my case, no tax because I have it within IRA.

[kathyjoe1967]

Have been a holder of PPL stock for about 2 months so far. Will add more in small increments to average down.

Good dividend stock.

[Scott.dam]

You are very lucky Kathy... PPL will be exploding as soon as they start reporting earnings in 2018...First one is May 2nd.

[rusty13]

"We all know what happens when that kind of rhetoric begins to slip into earning's calls.'

Well it seems the market as already reacted as it sits at $27.. A 4 year low..

[Blue Vinyl Radio]

I thought there would have at least been some discussion of the $1 Billion dollar in equity issuance for 2018 and the $500 Million to $1 Billion for 2019 and 2020. From the recent conference call:

"Secondly, we plan to issue about $1 billion of equity in 2018 compared to our prior guidance for equity issuances of $350 million per year. Our additional equity needs beyond 2018 will be dependent upon the performance of our businesses, foreign currency and regulatory outcomes.

Currently, we expect to issue between $500 million and $1 billion of equity in 2019 and 2020, with very minimal equity needs beyond 2020. We will work to minimize the amount of additional equity needed in 2019 and 2020."

That kind of dilution is going to make it hard to sustain the dividend - let alone grow it (the 5 year dividend growth plan was discussed before the tax law changes) and William Spence gave a sobering caution to investors on the earning's call: "I should point out that given our yield is significantly above our peer average, we will continue to monitor this as we consider the growth rate moving forward." - Not good. We all know what happens when that kind of rhetoric begins to slip into earning's calls.

[User 47998195]

The completely regulated business model coupled with conservative payout has provided a good deal of dividend increase security going forward. At under $30 there are few stocks paying 41 cent quarterly dividends with a 100% regulated business model. It has become increasingly worthwhile because it isn't suddenly unraveling fundamentally. My dad has lived in the KU service region for years and LG&E's in the 1990s. It was a good stock when it was sold as LG&E with KU and some South American subsidiaries which my dad held until they sold out to the company prior to PPL. Now, since Brexit, he's been adding PPL whenever panic hits investors and he's ended up with more shares for less per share than he expected.

[Todumb2learn]

Considering adding here but concerned about the UK issues.

Mostly posting this just so I can follow comments after 10 days.

[rusty13]

After 10 days?.. Is there a limit on tracking comments using the track comment tab?

[Todumb2learn]

rusty13,

After 10 days you lose access to articles that are linked to a certain ticker unless you either pay for the pro or you comment on them. If you comment on them then you can continue to read the comment section. You still need to be a pro member to access the actual article.

[rusty13]

Started a position today.. Will add on further dips..

[sam22]

If I remember correctly, PPL divested all of its generating facilities in Pennsylvania a number of years ago. It buys power through auctions on the PJM interconnection. In PA consumers can chose their electricity supplier, many of which are cheaper than PPLs' price to compare.

[User 37007326]

Just started a position in PPL as I’m building a dividend portfolio. As with many other companies I feel that irrational selling has pushed this down, happy to drip for many years if I’m wrong.

[$DUST]

In addition, there's been recent flight by the investors, which makes me a bit hesitant to jump in. I have a small position and was tempted to add more, but something tells me I'm missing a crucial part here.

[$DUST]

insiders*

[stan11]

Dust: I think a couple of crucial things in the mill are rising interest and the UK bill to cap utility bills. PPL generates nearly 60% of earnings from the UK where the country is undergoing political reform because of its pending exit from the EU. Prime Minister Theresa May recently announced a price cap on electricity and gas bills in the country in an effort to combat “rip-off energy prices once and for all.” The bill is temporary and set to expire in 2020, but could be pushed for extension through 2023.

This bill will potentially create an energy cap for 11 million households across Britain and was introduced to Parliament last week.
https://ind.pn/2FQxBXU

I'm long PPL and holding for now.

[Scott.dam]

Stan11... Are you short PPL? It appears the article is discussing producers, not the T&D companies, which PPL is. I contacted OFGEM myself and they said the rates are good until 2023... PPL is in great standing with the OFGEM.

[LoveStar]

Hale, did you not think to mention the up to $2B in additional stock sales in the next 2 years that was also covered in the conference call?

Why do you think the stock is now below its 5 year low?

[Hale Stewart]

Their cost of equity is 3.31% while their average cost of debt is 4.4%. Like all utilities, they need capital on an ongoing basis. At this point, equity is the smarter move.

[Scott.dam]

That's a great response Hale. I certainly wasn't upset about the incremental equity in lieu of debt. PPL has been spending over $3B in capital spending each year and honestly when you look at the numbers its hard to see the return. Here is a company that over the last few years has been investing more than 15% of their current market cap annually. Need to start showing the growth.

May I ask how the 3.31% of equity is calculated? I would have thought the answer is the dividend % which right now is approaching 6%..

[Scott.dam]

Hale, tomorrow is PPL's ex dividend date, and the stock is likely to fall to a point where it crosses the 6% dividend yield. If this occurs this seems like a worth while headline for a new article...

[jayridescarbon]

Thanks for the update. I started a position about 7 years ago and have added over the years. Today I topped off at 28.

[douglas42]

Fear of rising interest rates is really taking over. Plus the cross-pond exposure seems to be a negative not a positive. I’m just gonna sit on my holdings and collect dividends, but it’s been a tough ride.

[Scott.dam]

You ain't kidding brother...

[AndreP]

Just relocated to KY and became a customer. Not a reason to invest but the price appears reasonable and the dividend will pay my bill.

[Scott.dam]

I could be wrong, but I thought PPL's margins are higher because they have become primarily a transmission and distribution company. Producing the electricity is the biggest cost of goods sold, but I believe they now only produce in their Kentucky foot print.

[tomsum]

" However, their gross margin has increased substantially due to their reliance on coal-fired power generation" This kind of conflicts with your opening position in your summary.

[Hale Stewart]

Thanks. I've submitted the correction, which should be forthcoming.

[petektf]

I've been on the fence about ppl, my gut tells me to buy some, but my head says I don't need it and it's just another higher risk utility.

[Mike Zoerer]

I own some PPL, bought at higher prices than current. I am adding in small portions as it falls, but currently I am really wondering am I missing some key information? right now with a divi of 1,64 for 2018 we have a yield of 5,8% - pretty nice one could say, if sustainable.
I would not have thought it would drop below 30, but was proven wrong...
Lets see where we are at the end of this year.

[subaruguy]

After diligent research, I purchased shares at $29. I always set at
10% loss limit. best to all