First Look at PPL Corp,

Bonds outstanding: $1.8 billion; nothing big due until 2019.  The company’s bonds are not a threat to the dividend.

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What the company does – PPL is an integrated energy holding firm with four segments. Supply owns and operates about 11,200 megawatts of generating capacity. The international regulated delivery segment operates distribution networks providing electricity service to customers in the United Kingdom. The Pennsylvania regulated delivery and transmission segment provides distribution to 1.4 million customers in central and eastern Pennsylvania.

Morningstar’s take – PPL has shifted its business profile from its competitive electricity generation and marketing segment to a profile focused on its regulated utility business. Prior to the acquisition of Louisville Gas & Electric, Kentucky Utilities, and Central Networks, PPL derived 75% of its earnings from its competitive supply segment. By 2013, PPL’s regulated business will generate 75% of EBITDA. While this diversification offers a more stable earnings outlook, investors will be less able to partake in the upside when power prices eventually rebound. However, PPL is still able to earn higher returns than its fully regulated peers.

DIVIDEND RECORD – PPL grew dividends until a 19% dividend cut in 1998.  Growth from the cut to today’s $0.35 quarterly dividend.

Dividend: $0.36 quarterly (starting in MAR 2012).  Last dividend was $0.35 quarterly.

Dividend yield: 5.1% ($1.44 annual dividend in MAR 2012 / $28.31)

Dividend payout ratio: 55% ($1.44 / $2.62 recent Google Finance EPS) OR 86% using average earning power ($1.44 / $1.67 six year average adjusted earning power)

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EARNING POWER – $1.67 @ 578.3 million shares

(Earnings adjusted for changes in capitalization)

EPS

Net income

Shares

Adjusted EPS

2006

$2.24

$813 M

363 M

$1.41

2007

$3.35

$1,288 M

384 M

$2.23

2008

$2.47

$930 M

375 M

$1.61

2009

$1.08

$407 M

376 M

$0.70

2010

$2.17

$938 M

432 M

$1.62

2011 (est)

$2.59

$1,422.67 M

578.3 M

$2.46

EPS

Net income

Shares

Adjusted EPS

2011 Q1

$0.82

$401 M

484 M

$0.69

2011 Q2

$0.35

$196 M

562 M

$0.34

2011 Q3

$0.76

$444 M

578 M

$0.77

2011 Q4 (est)

$0.66

$381.67 M

578.3 M

$0.66

2011 total (est)

$2.59

$1,422.67 M

578.3 M

$2.46

Six year average adjusted earnings per share is $1.67

Consider contrarian buying below $13.36 (8 times average adjusted EPS)

Consider value buying below $20.04 (12 times average adjusted EPS)

PPL Corp. is currently trading at 16.95 times average adjusted EPS.  This stock is still priced for investment, but it is headed toward speculative pricing.

Consider speculative selling above $33.40 (20 times average adjusted EPS)

BALANCE SHEET – What assets did PPL Corp. buy from 2009 – 2011?  They doubled their assets in two years.

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Book value per share: $18.75

Price to book value ratio: 1.51 (under 1.0 is good)

Current ratio: 1.19 (over 2.0 is good)

Quick ratio: 0.33 (over 1.0 is good)

Debt to equity ratio: 1.63 (lower is better)

Percentage of assets in property, plant & equipment: 65%

CONCLUSION – PPL has been a fairly consistent dividend payer and grower since 1998.  The high dividend payout ratio of 86% using average earning power is a little disconcerting especially since PPL has large capital expenditures that also compete for net income.  I think the company will have to issue more debt to make ends meet and to sustain the dividend.  The stock price is a little too high for me at 16.95 times average adjusted earnings of $1.67.  PPL should be bought below $22.  At that price there would be a high dividend yield of 6.5%.   Their balance sheet looks okay, but the low current ratio (current assets / current liabilities) and quick ratio (cash / current liabilities) bothers me.  Where is PPL going to get the money to cover their current liabilities.  I’d like to see the stock price drop closer to the book value per share before I would consider buying.

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DISCLOSURE – I don’t own PPL Corp. (PPL).

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Published in: on February 22, 2012 at 1:02 pm  Leave a Comment  

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