Former simulated Dividend Growth Newsletter portfolio idea PPL Corp turned in strong earnings from ongoing operations growth in the first quarter of 2018 despite its UK segment, its largest business, taking a meaningful step back in the period.
By Kris Rosemann
It has been tough sledding for shares of former simulated Dividend Growth Newsletter portfolio idea PPL Corp (PPL) as the high-yielding utility stock has not fared well amid a rising interest-rate environment. We parted ways with the idea in December 2017 in anticipation of rising rates, and a potentially material regulatory overhang exists in pending UK legislation to enact energy price caps on electricity and gas utilities. Some observers believe the cap could be in place by Christmas 2018, and regulatory bodies could ultimately extend the price cap through 2023.
Even without the potential price cap, PPL’s UK operations, which accounted for ~57% of 2017 earnings from ongoing operations, weighed on its results in the first quarter of 2018, results released May 3. Earnings from ongoing operations in the first quarter grew to $0.74 per share from $0.62 in the first quarter of 2017 thanks to strength in its domestic business driven in part by higher volumes and rates in its Kentucky segment and lower expenses in its Pennsylvania segment, but UK regulated earnings from ongoing operations per share fell to $0.37 from $0.45 due to one-time tax items, an April 2017 price decrease, lower volumes, and share dilution.
The overall strength in PPL’s earnings from ongoing operations allowed management to reaffirm its 2018 guidance for earnings from ongoing operations per share in a range of $2.20-$2.40, and the company continues to expects an earnings per share CAGR of 5%-6% from 2018-2020 off the midpoint of this guidance. The company expects its equity financing needs through 2020 to be near the lower end of its previous guidance of $2-$3 billion due to the impact of US tax reform. It also received some favorable news as the UK regulator Ofgem decided to forgo a mid-period review during the current RIIO-ED1 price-control period.
Though our core rationale for removing PPL as an idea in the simulated Dividend Growth Newsletter portfolio was the rising interest-rate environment (we also removed the Vanguard REIT ETF (VNQ) from the Dividend Growth Newsletter portfolio and the Utilities Select Sector SPDR ETF (XLU) from the Best Ideas Newsletter portfolio at that time), the pending legislative risk in its largest segment provides additional risk. The UK is undergoing massive political reform as it prepares to exit the European Union, giving us additional reason for pause when considering its otherwise solid forward-looking expectations. We don’t expect to highlight PPL as an idea (again) in the simulated Dividend Growth Newsletter portfolio for the foreseeable future despite the stock currently yielding ~6%. We currently value shares of PPL at $31 each.
Related: XLU
—–
Valuentum members have access to our 16-page stock reports, Valuentum Buying Index ratings, Dividend Cushion ratios, fair value estimates and ranges, dividend reports and more. Not a member? Subscribe today. The first 14 days are free.
Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.