Daniel Balakov
About a year ago, I voiced my concerns on the prospects for PPL Corporation (NYSE:PPL) even after the company had announced a major dividend cut. In fact, the dividend was cut in half to $0.20 per share, still translating into a near 3% dividend yield itself based on an annual payout of $0.80 per share.
This move did not come unexpected to some; in fact, I anticipated that it would and should come way sooner, especially after a string of recent M&A activity.
A Recap
PPL Corporation was a group of utility companies which had activities in Pennsylvania, Kentucky, and the UK. A couple of years before, the company was posting earnings of around $2 per share, split quite equally between the U.S. and UK operations.
The issue with the business was that the company was paying out a steep $1.60 per share dividend, resulting in a payout ratio of 80%, and that on very adjusted earnings. Even if the earnings were clean, and there was $0.40 per share in earnings power to keep leverage under control, net debt was huge, reported at around $20 billion in 2018. This number was even ahead of pension liabilities and asset retirement liabilities.
Moreover, capital spending of $3 billion a year was equal to about three times the annual depreciation charge, resulting in large net capital investments.
To bring in some badly needed cash flows, PPL sold 55 million shares at $27 in 2018, as the company incurred 8% dilution, while the move hardly made a dent in addressing leverage. With earnings trending around $2.50 per share ahead of the pandemic and during the pandemic, net debt only rose further to $24 billion, with the net debt load being roughly equal to the equity valuation.
The company announced two big corporate moves in 2021. For starters, it sold the Western Power Distribution business in the UK, appraised at a $19.4 billion enterprise valuation at the time, only to acquire Narragansett in a $5.3 billion deal to expand into Rhode Island. The simultaneous selling and buying of assets, including a substantial accelerated buyback program, made that net debt was only tackled in a smaller way than the headline number for the UK operations suggests.
The idea was to get rid of competitive and volatile UK operations, moving into more stable and regulated state operations, as the dealmaking made that earnings took a significant short term beating, seen by me far below the $2 per share mark, with management initially leaving investors in the dark.
With the company posting the 2021 results early in 2022, the shocker was that adjusted earnings for the year (post the UK divestment) only came in at $1.05 per share, although this number did not include an earnings contribution from Narragansett of course. Net debt was seen at $13 billion following that deal, yet pro forma EBITDA was only seen at $2.5 billion (ahead of Narragansett), making that leverage ratios likely remain high above 4 times, likely near 5 times.
More so, the U.S. operations require capital spending of $2 billion, still twice the annual depreciation charge, as net capital investments of a billion exceed the earnings power (which is still largely paid out, even after a 50% dividend cut). With shares holding up to $26, I pegged the pro forma earnings multiple at 20 times early last year, still a huge multiple give the leverage position and very poor track record.
2022 – Stability
After voicing a cautious tone at $26 last year, shares have been trading in a tight range between $24 and $30 over the past year, now trading hands near the $29 mark.
In May, PPL closed on the purchase of Narragansett, that is just after posting first quarter results. In the summer, the company outlined financial plans hiking the dividend to $0.225 per share (on a quarterly basis) after the Rhode Island deal closed. Second quarter results were released in August, as the company reaffirmed the ongoing earnings forecast between $1.30 and $1.45 per share.
By November, PPL posted third quarter results, as the company hiked the lower end of the original earnings forecast to $1.35 per share, thereby increasing the midpoint of the guidance to $1.40 per share. Part of this comes from higher prices of course. Net debt is posited at $13.5 billion, as this will increase amidst net capital investments amidst still high payout ratios.
Concluding Remarks
Truth is that I am quite impressed with how PPL Corporation has fared over the past year. Earnings power to the tune of a dollar, as communicated this time last year, has risen to $1.40 per share following the Narragansett purchase, and solid operating conditions for the firm (higher pricing). That is about all the good news, as this still results in about 20 times earnings multiple.
In the meantime, the focus on the U.S. has been beneficial, resulting in more earnings stability due to regulatory protection. However, on the leverage front, PPL Corporation ratios are high and net capital investments are substantial, with management addicted to preserve a high payout ratio.
Given all of this, PPL Corporation remains a very easy avoid for me here, although the company’s actions have played out better than anticipated this time last year.
Be the first to comment