UGI - UGI: Utility Gas Income Company With Yield Of 6.9%

2023-12-13 22:02:36 ET

Summary

• UGI Corporation is a utility company with a 6.9% dividend yield and potential for capital gains.
• It operates in four segments and distributes to various types of customers.
• Analysts have different future price targets for UGI, ranging from $29 to $35.
• Morningstar gives UGI a fair value of $32.59.

UGI Corporation (NYSE: UGI) is an attractive 36-year dividend champion utility company headquartered in King of Prussia, PA. being incorporated in 1882 and having an S&P credit reading of “A”.

It can blow up your income with its current 6.9% yield with a nice potential for capital gains, but patience is advised. It distributes, stores, transports, and markets energy products operating in 4 segments:

- AmeriGas Propane

- UGI International

- Midstream and Marketing

- UGI Utility.

It distributes to ~1.3 million various types of customers along with having 1400 propane/ LPG distribution locations.

PA. is its largest utility electric/ gas base with ~670,000 customers.

AmeriGas Partners is the largest US propane marketer having 1.5 million users in 50 states.

Price

Below are the price targets of some analysts:

-Value Line “VL”

Below from “VL” is the 18 months out “PT” price target of $35 and a rising higher 3- 5-year PT terrific price appreciation. Slow, but up.

-Yahoo Finance has a 1-year PT of $29.

-Seeking Alpha chart below reveals for this year to date "YTD" UGI has perhaps hit a somewhat level base price, bouncing a tiny bit, but not going lower, it has leveled out and perhaps is rising a bit, maybe, please.

It also shows how much the price has fallen this year, sadly down 42.7% or so.

-Morningstar

“M*” analyst fair value price is $32.57 and suggests it is 32% undervalued.

-FAST Graph

Below from “FG” is an 8-year chart: 6 years completed and 2 looking forward. The dark green area in the chart represents earnings with the orange line being fair value with a P/E of 15x. The black price line has gone from rising up being overvalued in 2017- 2019 as it flies above the earnings and descends into the covid recession (gray area) to undervaluation to end 2019 at a very low price of $21.75, as noted at the top of the chart. Price recovered back up some in 2021 to near normal 15.72x P/E. and ~ $40. After that, it again has moved irregularly up and down in price, but deeply into undervaluation with a P/E of 7.76x. Price shown here is $22.10, but it did get down to $20.19 per the chart statistic shown.

The normal P/E or blue line is 15.72x, which is 50% above where it is selling now, which seems definitely undervalued by that metric.

-RoseNose

The Buy cheap price I have for it is $21.44 = 7% yield but would suggest anyone to buy some now as a starting position.

Dividend

Below is a 5-year listing from “FG” showing dividend and payout performance.

It has a 5-year dividend growth rate of 7.7%, with the last 2 years slowing down to ~4.3%. The most recent raise was from 36c to 37.5c quarterly, a raise of 4.26%.

It goes ex-dividend on December 14th for payment on January 1st, 2024.

Knowing it will pay at least a $1.50 per year dividend and at the current price of $21.82 the yield of 6.9%. The next dividend raise should be announced in May of 2024 for the June payment. I own quite a nice position already, starting the position in April this year having waited for it to fall to 15x P/E and having a yield of 5% which at the time was quite pleasing. Future dividend estimates per FG show it is steady, but raises are minimal, not anywhere near the past, nor even the 4.2% raise of last year. To me, it looks to be perhaps more like 2.6%, which time will tell, but not until next May.

The Fut u re

Earnings per share yield per the Fast Facts on the right side of the “FG” chart shows 12.88% agreeing with it being undervalued. However, the facts also show adjusted future earnings growth of 1.1%. Those earnings numbers are found at the bottom of the chart with an “E” for estimate. 2024 shows 1% and 3% for 2025, up, but not much. Earnings slow and steady also means, as mentioned earlier, smaller dividend raises.

Risk

The underwhelming earnings are suggested to be from warmer fall and winter US temperatures, rising interest rates, and armed conflicts in Ukraine and the Middle East causing turbulence in European operations.

Good news is that management has been attempting to divest itself of non-core operations in Europe.

Positives

Divestiture of non-core operations should increase efficiency, grow core competitiveness, and increase customer growth in all operations, especially regulated utilities. Regulation helps with getting rate increases which might be pending that will lead to organic growth as it enters into renewable projects such as bio-LPG. The timeliness of the suggested changes is not immediate but should lead to a wider moat for the future and potential price appreciation. Seasonal temperature patterns from October to March determine earnings and remain unknown as yet. Falling temperatures into 2024 are always positive for earnings for all utilities.

Summary/Conclusion

UGI Corp. is a quality company with a safe dividend and should continue to be that way. Price decline is probably close to over, but a recession especially if a hard landing will mean lower prices for almost every investment. If I did not own any, I would be buying more. I do suggest it as a good buy here and now as a great starting position for anyone without a position for its safety and high yield. To repeat the best cheap RoseNose PT for it is $21.44 to get a 7% yield. As I own a nice position, I will wait to add as I would like to know the outcome of interest rates, a possible recession, and even the severity of this winter heating season here in Iowa, PA where UGI is headquartered and in Europe. I believe in UGI as a quality company with a reliable dividend that will offer good income while waiting for future capital gains.

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