PPL Company (NYSE:PPL) could possibly be set to ship peer-leading development within the regulated utility sector following its enterprise transformation. Traders, nonetheless, seem to nonetheless want convincing, following the sacrifice to its near-term earnings and dividends, which resulted from the corporate’s strategic repositioning.
This autumn Earnings
First, let’s check out its latest quarterly earnings launch. On February 17, 2023, PPL reported adjusted earnings from ongoing operations of $0.28 per share for the fourth quarter of 2022. This fell in need of the consensus forecast for non-GAAP earnings of $0.29 per share.
However, traders reacted positively to the truth that earnings exceeded the corporate’s earlier steerage. The corporate delivered adjusted EPS of $1.41 from ongoing operations for the 2022 full yr, beating administration’s forecast midpoint of $1.40. Shares in PPL closed 1.3% larger on February 17, 2023.
PPL additionally elevated its quarterly dividend by 7%, from $0.225 per share to $0.24 per share, starting with the fee due on April 3, 2023. This displays its lately introduced coverage to develop dividends in step with projected earnings development, whereas sustaining a dividend payout vary of 60-65%.
Trying ahead to the present fiscal yr, administration expects to realize ongoing earnings of between $1.50 to $1.65 per share, with a midpoint of $1.58 per share for 2023. That is simply barely beneath the consensus analysts’ forecast of $1.59 per share.
As a part of its technique to enhance shareholder worth and concentrate on its core enterprise of vitality technology and provide within the US, PPL bought its UK regulated electrical energy distribution enterprise, Western Energy Distribution (WPD) to Nationwide Grid (NGG), in June 2021. The UK unit was valued at £7.8 billion, and this resulted in web money proceeds of $10.4 billion for the group.
In a concurrent acquisition, PPL acquired Nationwide Grid’s Rhode Island regulated electrical enterprise, The Narragansett Electrical Firm, for $3.8 billion. The strategic repositioning drastically reworked PPL right into a US regulated utility pure-play, and extra importantly, freed up monetary assets to capitalize on new alternatives to put money into renewable vitality and grid modernization.
The transactions additionally enabled PPL to sort out its excessive leverage ratios, and the advance in its steadiness sheet has been mirrored by a latest credit score scores improve. Moody’s Traders Service upgraded the group’s ranking to Baa1 from Baa2, in June 2022, whereas S&P has maintained an A- ranking.
With the improved monetary flexibility, PPL in January introduced an up to date marketing strategy to ship top-tier earnings and dividend development for shareholders. The corporate intends to considerably enhance investments in its Kentucky electrical energy community – with a greater than 20% enhance from its capital spending plan final yr. That is a further $2.5 billion, which might deliver its complete capex to $14.3 billion between 2022 and 2026.
The deliberate technology and transmission investments are anticipated to extend PPL’s projected development charge in its common annual charge base to five.6% by 2026, up from 3.5% beforehand.
Elsewhere, the corporate is seeking to increase its working and upkeep value financial savings goal by a minimum of $175 million by 2026, from the centralization of shared providers, effectivity investments, and digital transformation.
Administration expects these modifications would allow PPL to generate 6-8% earnings development by to a minimum of 2026. This may put PPL in step with a few of the fastest-growing names within the sector, together with NextEra Power (NEE), which is anticipating an analogous degree of earnings development by to 2026. In distinction, Duke Power (DUK), Southern Firm (SO), and Consolidated Edison (ED) count on barely decrease earnings development, of between 5-7% over the identical interval.
It is clear that PPL’s improved development prospects have come at the price of its near-term profitability. In any case, one thing has needed to give means within the pursuit of development and decrease debt ranges. WPD had as soon as generated a majority of PPL’s earnings; however excessive leverage on the group prevented it from making the most of new alternatives arising from rising EV adoption and the decarbonization of its electrical energy networks.
As such, PPL’s adjusted ongoing earnings had been stagnating for the previous decade or so. Between 2011 and 2020, PPL’s adjusted annual EPS got here in between $2.21-2.72. Furthermore, the final full yr that WPD was handled as an ongoing concern noticed PPL generate adjusted EPS of $2.40 in 2020.
This compares to an estimated $1.48 in ongoing EPS for 2022 on a professional forma foundation – Rhode Island Power was acquired in Could 2022. From right here, this means a 38.3% lower in adjusted EPS following the asset swaps with Nationwide Grid.
In the meantime, its quarterly dividend had been lower by 51.8% to $0.20 per share in early 2022. It has since been elevated to $0.225 per share – and can rise additional to $0.24, starting with the April 2023 fee.
Has The Technique Paid Off?
From PPL’s inventory worth efficiency, plainly traders are nonetheless undecided over whether or not the strategic repositioning is definitely worth the sacrifice to earnings and dividends within the quick to medium time period. Because the resolution to promote WPD in August 2020, PPL’s complete return has lagged behind a lot of its friends within the regulated electrical sector – though NextEra Power is a notable exception.
But, valuation multiples counsel that traders could not totally recognize PPL’s improved development outlook. The inventory trades at round 17.9 instances its anticipated earnings in 2023, in comparison with the sector median ahead PE of 19.0.