My Financial Independence Journey » Stock Analysis » PPL Corporation (PPL) Dividend Stock Analysis
PPL Corporation (PPL) Dividend Stock Analysis
PPL Corporation (PPL) is a holding company for electric utilities in Kentucky, Pennsylvania, and the United Kingdom. Though it’s various subsidiaries, PPL is involved in power generation, transmission, and distribution. PPL provides electric service to around 1.4 million customers. In 2011 PPL completed its acquisition of Central Networks, the second largest electric distribution company in the U.K.
PPL Basic Company Stats
- Ticker Symbol: PPL
- PE Ratio: 12.53
- Yield: 4.6%
- % above 52 week low: 99.8%
- Beta: 0.15
- Market cap: $18.98 B
- Website: www.pplweb.com
PPL vs the S&P500 over 10 years
Over a 10 year period PPL is generally moving on par with the S&P500. Both investments grew by about 75-80%. There was a huge spike in PPL’s value in 2007 and 2008, right before the Great Recession hit. I would not expect to see this again.
PPL Earnings Per Share (EPS) & Dividend Growth
- 1 year EPS growth: 0.8%
- 3 year EPS growth: 9.3%
- 5 year EPS growth: 1.8%
- 10 year EPS growth: 2.6%
EPS growth for PPL is basically flat, with a dip in 2009 during the Great Recession. Given the highly regulated nature of utilities, this doesn’t really surprise me.
- 1 year dividend growth: 2.9%
- 3 year dividend growth: 1.4%
- 5 year dividend growth: 1.8%
- 10 year dividend growth: 7.2%
Much like EPS, dividend growth for PPL is basically flat.
With a starting yield of 4.6% and a growth rate of about 2%, PPL’s yield on cost will grow to about 5.5% in 10 years. In order to double the dividend, using the rule of 72, it will take approximately 36 years.
PPL Payout Ratio
PPL’s payout ratio has remained relatively flat in the 50% range. There was a spike in 2009, but now things appear to be back to normal.
PPL Revenue Growth
- 1 year revenue growth: -3.5%
- 3 year revenue growth: 20.1%
- 5 year revenue growth: 11.2%
- 10 year revenue growth: 9.2%
PPL has shown relatively slow revenue growth over time. Except for the last two years, where the revenue has jumped up likely due to the acquisition of Central Networks. Given that utilities are highly regulated and can’t easily raise prices or expand their services, this is the kind pattern I would generally expect.
PPL Risks
PPL, like other electric utilities is subject to market fluctuations in the price of electricity which are often related to the price of commodities used to generate them. For example if coal, oil, natural gas prices spike, then electricity generated by those fuels costs more. Utilities are highly regulated, which means that PPL only has a limited ability to raise prices in response to increased electricity costs. Also, it’s important to note that PPL can only expand by purchasing another company’s customers or facilities. It cannot compete directly with other utilities for business.
There is one exception to this, and that is the unregulated electric supply market. In this market, customers can purchase electricity directly from whomever they want. The power is still transmitted and delivered by their normal utility company, it’s just supplied by a different company.
PPL Valuation Panel
Graham Number
The Graham number represents one very simple way to value a stock. The Graham number for PPL is $32.46. The current stock price is about the same, suggesting that PPL may be fair valued at the moment.
Gordon Growth Dividend Discount Model
Using a risk free rate of 2%, an expected return of 10% and the beta of 0.15, the CAPM model provides a discount rate of 11.2%. Using a dividend growth rate of 2% this model returns a value of $31.49, suggesting that PPL may be fair valued.
Valuation Conclusion
Based on the two different models used, it appears that PPL is fair valued.
PPL Cash Secured Puts
I wouldn’t consider buying PPL at this time, nor would I consider selling puts against it.
Conclusions
Overall, I feel that while PPL is fair valued at the moment, it’s dividend growth is incredibly slow. I do own some PPL and would like to increase my utilities holdings, but I do not feel that purchasing more PPL at this time would be the best way to accomplish that. If PPL’s price drops towards its 52 week low, I may reconsider.
Disclosure: I am long PPL.
Readers: What are your opinions about PPL?
Written by MFIJ
Filed under: Stock Analysis · Tags: ppl, stock analysis
11 Responses to "PPL Corporation (PPL) Dividend Stock Analysis"
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Unfortunately, utilities are overvalued as a group. I don’t think now is a good time to be buying most of them although I’m sure there’s a select few that are decent values right now.
When utilities valuations come down I’ll be interested in purchasing some because the higher yield is helpful.
Thanks for the analysis.
Really, as a group you think they’re overvalued? Can you explain a bit more why you feel that way?
Using the XLU as a proxy for the utilities sector the dividend yield is only 3.27%. Considering utilities as a whole typically trade closer to a 4% yield and don’t really grow by leaps and bounds I’d say they’re still overvalued as a group. That’s not to say there’s not select ones that are undervalued though.
Utilities had a big run up as investors were starved for yield over the past few years.
Another great overview here. A 4.6% yield seems like a great benefit to buying the stock for a dividend investor.
I was not familiar with that company, but I’m always interested to hear of anything based in Kentucky. Thanks again for a very thorough analysis.
I did a double-take when I saw the title of this post–I know people who work at PPL!
Nice write up. The dividend growth is probably a little too low for me on this one, but a healthy starting yield though.
Hey MJFI,
I’ve been reading your blog for a bit now and really like it. Found it via D. Mantra’s site. Informative and entertaining. Your occasional wry comment is especially appreciated.
Anyhow, I can speak a bit to PPL as an investor and a customer. I recently purchased a fairly large stake in the company late last year. I currently hold about 15 stocks and wanted a core of five stocks. Four of core are consumer/diversified healthcare (PEP, PG, MCD, JNJ) w/ low-med yields but I wanted one that would be a high yielder to beef the core’s yield up a bit. I decided to choose a utility and bought PPL at about 28-29. It was one of the few utilies that I thought was fairly valued at the time plus it was actually my utility as I live in their home territory of eastern PA.
What PPL has been doing in recent years is what they call “derisking”. Basically, they are purchasing more regulated assets (transmission/distribution of electricity) and selling off some of their regulated assets (power generation). Prior to electricity deregulation, their revenue mix was about 70% generation/30% transmission. Now, their revenue mix is close to the mirror opposite (30% generation/70% transmission).
This gives PPL a more stable cash flow from the regulated business operations and less exposure to the potential volatilty of the unregulated power generation market. This is the “derisking” PPL’s management was referring to. The stock’s low beta reflects this.
What does this mean for investors? Well, with PPL you’ll get a high yielding stock that has a fairly reliable customer base and cash flow. So, purchased at a reasonable valuation, you’ll get a yield north of 5% and a reliable dividend.
But since much of their revenue comes from regulated operations, its growth (as you pointed out) is limited. Of course, it follows that divy growth will be limited. I think an investor can probably only expect 3-4% avg annual dividend growth from this company.
But, I think that’s the trade-off. High yield but low divy growth. That’s often the case. As an investor, I purchase mostly low-med yielding (usually mid 2 to mid 3%) stocks. But I want to mix in a few like PPL that have high yields and accepting the trade-off of low dividend growth. That’s why I decided to include it as one of my “core” stocks along with the more oft mentioned consumer ones.
As a consumer living in their home service area, I can attest that the company has a generally good rep in the community.
Sorry, typo. I meant to say “selling off some of their UNregulated assets”.
Thanks for the input. That’s some great info for anyone who’s considering investing in PPL.
I actually think PPL is a good buy at this price drop. I donot have cash available in my ROTH, so I am not buying, but I think it is fairly valued at the current price and worth buying.