Dividend growth gem PPL (click ticker for report: ) posted strong second quarter results Wednesday. The firm earned $0.51 per share during the second quarter, year-over-year growth of 13% and much stronger than the Street predicted. Revenue grew 2.4% year-over-year to $2.5 billion, which was also much stronger than consensus estimates. The company reaffirmed its outlook for a year-over-year operating earnings decline driven by lower margins in its energy supply business. For the full-year, the utility forecasts operating earnings per share of $2.30 (a range of $2.15 to $2.45), down from earnings of $2.73 per share during 2011. Though earnings are moving in the wrong direction, we continue to like the firm’s yield relative to peers.
Since PPL is primarily a utility, its earnings stream is relatively stable and predictable in several segments. Earnings in its Kentucky business grew slightly year-over-year, but are expected to be down due to higher operating expenses. The UK business grew year-over-year during the second quarter and will increase for the full-year due to a greater amount of time being included in results. Pennsylvania saw earnings fall slightly due to modestly higher operating expenses. Like Kentucky, the Pennsylvania business will decline in profitability due to lower operating margins. Though the decline in utility businesses looks to be low or modest at most, the supply business segment’s earnings are predicted to fall substantially. The segment earned $1.15 last year, but management expects it to earn just $0.70 this year due to substantially lower margins and lower capacity utilization.
Still, the firm shouldn’t struggle to meet its dividend obligations anytime soon. Since the majority of its business is regulated, cash flows are very predictable and the firm’s business is relatively safe in the near-term. We think PPL is fairly cheap, especially for a utility, though the firm scores a 6 on our Valuentum Buying Index (our stock-selection methodology), suggesting we’re stilling growing constructive on the shares (as it relates to entering a brand new position). Shares of PPL are held in our Dividend Growth Newsletter portfolio.