PPL - PPL Corp.: Strategic Repositioning Fostering Growth

2023-05-02 06:03:07 ET

Summary

• PPL's previous quarterly earnings were strong in regards to revenues and down on EPS due to restructuring.
• Adjusting for dividends, the company has maintained performance with the S&P 500.
• Recent restructuring provided the necessary FCF to expand in the USA, raise the dividend, and upgrade current systems.
• Assuming my DCF assumptions, PPL is currently overvalued resulting in a hold rating.

PPL Corporation (PPL) has exemplified strong and consistent growth throughout the past few decades. With their recent restructuring program taking effect in the USA, and solid dividend yield, I rate the stock as a hold due to their slight overvaluation assuming my DCF later in this article.

Business Overview

PPL Corporation is a holding company that supplies electricity and natural gas to customers in both the United States. The company is divided into three segments: Kentucky Regulated, Pennsylvania Regulated, and Rhode Island Regulated. Its service areas include Louisville and nearby regions in Kentucky, central, southeastern, and western Kentucky, and five counties in southwestern Virginia. In addition to providing electricity to customers in 29 counties throughout eastern and central Pennsylvania, PPL generates electricity from various sources such as coal, gas, hydro, and solar in Kentucky.

With a market capitalization of $21.157 billion, a 52-week high of $31.74, and a low of $23.47, a price of $28.77 with a 29.64 P/E represents a share price close to its highs and also a high P/E which indicates overvaluation as discussed in my DCF later in this article.

PPL Corporation also pays a dividend of 3.34% representing a payout ratio of 90.29% giving shareholders stable returns over the years. This is because as a utility company that is well-established, PPL does not need such large FCF amounts to grow the business but rather split it among shareholders and improve its core business model.

PPL Corporation has also issued shares in the past years, mostly for acquisitions to accompany their restructuring plan, moving operations from the United Kingdom to the United States. I do not see such issuance of shares as a problem as PPL Corporation has already repurchased shares and is on track to reach their 2016 levels in the near future.

With mixed 2022 results for PPL Corporation with a 41.14% beat on revenues ($1.62 billion compared to $2.29 billion) and a miss on EPS ($0.29 compared to $0.28), the company is outperforming expectations for growth which have displayed their continuous excellence within their market. PPL Corporation has confirmed its previous earnings forecast range of $1.50 to $1.65 per share for 2023, while simultaneously announcing a 7% increase in its quarterly stock dividend from $0.225 per share to $0.24 per share. This success in earnings and growth of dividends can be attributed to the company's confidence in its restructuring plans, which are expected to generate greater free cash flows in the future. This will enable PPL to pursue further acquisitions that align with its commitment to sustainable sources of energy, providing the company with diversified cash flow opportunities.

Keeping up with the Broader Market

Despite maintaining a high dividend payout, PPL Corporation's ongoing commitment to reinvesting in its core business model has enabled the company to establish a strong foothold within the utility industry. By differentiating itself and building up a substantial amount of capital, PPL has been able to create a significant competitive advantage and protect against both existing and potential competitors. Furthermore, even after adjusting for dividends, PPL's performance has met the S&P's performance in the last 10 years demonstrating the company's long-term success.

Business Restructuring Fostering Growth

Following PPL Corporation's announcement of its plans to restructure and focus primarily on the United States, the company sold Western Power Distribution, its UK-based subsidiary, to National Grid for $10.4 billion in 2021. With this substantial amount of free cash flow now available, PPL has the opportunity to expand further within the US and upgrade its existing systems. The company's recent acquisition of The Narragansett Electric Company (now Rhode Island Energy) from National Grid for roughly $3.8 billion exemplifies this expansion and highlights PPL's commitment to improving its US performance while working towards net-zero emissions in line with Rhode Island's goals. Furthermore, PPL has announced an $11.9 billion capital investment program designed to reinforce both new and existing grids, diversifying the areas in which they operate and creating new cash flow opportunities. With the proceeds from the sale of Western Power Distribution, PPL is well-positioned to continue growing its dividend and pursuing further acquisitions in the future.

PPL Corporation anticipates achieving a CAGR of 6-8% in both dividends and EPS through 2026 as a result of this strategy. This rapid growth, combined with a focus on rewarding shareholders, underscores PPL's commitment to expanding while providing a stable source of income for its investors.

Analyst Consensus

According to analyst consensus, PPL Corporation is currently rated as a "buy". The stock has demonstrated consistent returns, with analysts projecting a share appreciation to $31.64, representing a 9.96% upside from current prices. When factoring in dividends, it is evident that PPL presents a robust long-term investment opportunity that is expected to generate consistent returns.

Valuation

Before creating my assumptions and calculating my DCF, I will calculate the Cost of Equity for PPL Corporation using the Capital Asset Pricing Model. Factoring in a risk-free rate of 3.43%, I was able to conclude that the Cost of Equity was 6.96% as displayed below.

Based on an Equity Model DCF analysis that employed net income, I have concluded that PPL is currently overvalued by 11%, with a fair value estimated at around $25.51. This calculation was made using a discount rate of 6.96% for a five-year period and assuming a low to mid-single-digit revenue growth rate beyond 2023. Furthermore, I assumed that PPL would persist in enhancing its current grids and seamlessly integrate Rhode Island Energy, resulting in slightly better margins.

Risks

Regulatory Policy: Utility companies encounter various risks associated with utility regulatory business models, environmental and climate policies, and tax policies. Regulatory framework alterations can give rise to uncertainty for utilities, while environmental and climate policies can escalate costs or disturb service. Changes in tax policies could affect profitability or utility-supplied power demand.

Macroeconomic Headwinds: PPL could confront growth challenges as the possibility of a recession looms within the next year since increasing rates could restrict the company's access to significant cash. Nevertheless, despite this impediment, the company's revenue is projected to be less impacted than the overall market, given its position as a utility company.

Conclusion

To summarize, I believe PPL is on track to consistent growth with a strong dividend and a promising restructuring program. But, assuming my DCF values, PPL is currently overvalued resulting in a hold rating for the time being.

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