Recent Buy - PPL Corporation (PPL)

Well, I could no longer resist the appealing valuation of PPL Corp.  I actually have to give credit to Jason Fieber over at Mr. Free at 33 for bringing this company to my attention in recent months and I said as much in a comment on his blog shortly after my limit order executed. Initially, I had considered selling my position in NGG when it was trading at > $58/sh to finance this, but with the retreat in NGG's valuation I've decided to hold on to NGG and purchase PPL using a cash balance I have accumulated.  See details of the purchase along with some additional commentary below.

Purchased: 115 shares x $25.899 = $2,978.39 (+$4.95 commission)




Dividend Income: $188.60 annually ($1.64/sh annually; paid quarterly in Jan, Apr, Jul, Oct).  It just so happens that this purchase came a day before the ex-div date of 6/7/2018, which means I'll collect my first dividend from PPL totaling $47.15 on 7/2/2018.

Forward P/E vs. S&P Forward P/E: 11.3x vs. 17.0x for S&P

Debt to capital < 50%: No, 53%

Interest coverage ratio of at least 3:1: Yes, 3.9x

S&P and/or Moody's credit rating of BBB+/Baa1 or better: Yes, A

Current dividend yield > 1.5x S&P yield: Yes, 6.33% vs. S&P 1.91%

Payout ratio < 60% (or <85% for utilities): Yes, 71.3%

Dividend King or CCC classification: Contender (17 years of consecutive dividend increases)

Commentary: For the last week or so as I have do a bit of research on PPL I was having a difficult time seeing downside to purchasing this stock.  The company has paid a dividend since at least 1980 and for last 17 years has increased it annually.  Given the high current yield, high payout ratio, the modest near term EPS growth rate of 5-6% annually, and the nature of the regulated power industry itself, it should be no surprise that the CAGR for the dividend has been in the low single digits for the past decade and will likely continue to be such without a material growth catalyst.  Now, with that being said, it is worth mentioning that the company just announced today in a press release which can be read here, that PPL has agreed to acquire a solar solutions provider, Safari Engery, LLC.  Per the press release, management stated "the purchase price is not material to PPL. While PPL expects the transaction to be earnings and credit accretive immediately, the company does not expect Safari Energy to contribute meaningfully to PPL's earnings per share through the company's current forecast period, which extends through 2020."  Now, if this bolt on acquisition turns out to be something great, management is setting the expectation that owners shouldn't count on it prior to the year 2021.  The stock closed down 4.5% today and I can't help but think this was simply a knee jerk reaction to this news - go figure!

     Last month the company reported 2018 Q1 results and reaffirmed previously provided earnings guidance of $2.20 - $2.40 for the full year and an expectation of 5 to 6 percent compound annual earnings growth per share from 2018 through 2020 as seen here.

     As I have gathered and reviewed the information referenced above I have calculated an intrinsic value of $41.14 using the following assumptions (10 year growth rate at 4.5%, perpetuity growth rate thereafter of 3.5% and a discount rate of 8%).  Now, to further reduce the risk of making such assumptions, no matter how conservative one may think they be, a prudent investor will want to require a margin of safety of 20-40%. So, taking my purchase price of $25.90 and comparing it to the estimated intrinsic value of $41.14, you'll note that the stock was purchased at a discount of nearly 63% of the intrinsic value or said another way, the margin of safety is 37%.  My intrinsic value calc is a bit higher than the 12 month price target the CFRA has come up with as well as Morningstar's fair value estimate, both of which are set at $35, and both agencies assign a 5 star rating.  It is reassuring to know that I am not alone in noticing what appears to be great value at the moment.  At the time of purchase, PPL was the only stock that garnered a 5 star rating by both CFRA and Morningstar per MerrillEdge's stock screening feature.