We recently wrote up a relatively extensive piece on ‘Utilities Are Safe Income Vehicles…Most of the Time,” that we think is worth reading before diving into PPL’s (PPL) solid second quarter results, released Thursday.
For many income investors, dividends aren’t everything, they are the only thing, and we understand how important it is for us to focus on sustainable dividend growth in any idea that we present within the Dividend Growth portfolio, a collection of equities that we think will continue raising their dividends long into the future. We think PPL is one such company.
The company’s second-quarter and first-half earnings from ongoing operations increased 15% over the corresponding periods from 2013. Management couldn’t have said it better: “Strong performance at each of our regulated utilities, combined with stronger margins from our competitive energy supply business, led to very solid results through the first half of the year.” Earnings increased in all four of the firm’s business segments.
PPL also is working to spin-off its PPL Energy Supply business, which it had announced with private-equity firm Riverstone in June. PPL’s competitive energy business will be combined with Riverstone’s generation portfolio into a new publicly-traded company called Talen Energy. PPL shareholders are slated to own 65% of Talen Energy, and PPL, itself, will not have a continuing ownership interest in the newly-created entity.
Also in the second-quarter press release, PPL raised its 2014 forecast of earnings from ongoing operations to $2.20-$2.40 per share, with a midpoint of $2.30 per share, up from the previous forecast of $2.15-$2.30 per share, with the midpoint of $2.23 per share. Management attributed the increase to strong earnings performance of the competitive energy supply business through the first half of the year.
PPL provided forward earnings guidance when it announced the agreement with Riverstone last month. The company is targeting a minimum of 4% compound annual growth in PPL’s earnings per share from the midpoint of the company’s projected 2014 ongoing earnings, the guidance of which it just raised. PPL plans to continue to grow the dividend going forward, likely in-line with the pace of earnings growth, which we expect to outstrip inflation.
Valuentum’s Take
There are a lot of moving parts at PPL these days. Still, we think the company is worthy of inclusion in the Dividend Growth portfolio, and while we may remove its spin-off Talen Energy from the portfolio (when the time comes), PPL’s management is executing nicely and adding significant shareholder value, in our view. The company currently has a 4.3% annual yield.
For investors looking for more diversified utilities exposure, we include the Utilities Select SPDR ETF (XLU) in the Best Ideas portfolio.