PPL: 5.3% Dividend Yield and a Company Rebuilt for Widows and Orphans
PPL Corp. (PPL) has raised its dividend only modestly in recent years, a period in which the big utility company has been altering its business profile through a series of big-ticket acquisitions. But its dividend yield has risen to a impressive 5.3%, a result of the stock's decline, putting it in the top tier of the industry.
PPL isn't alone. A glance at the shares of utility holding companies like Exelon (EXC), FirstEnergy (FE), and American Electric Power (AEP) shows the industry’s fall from Wall Street grace a few years ago.
These days, a utility’s earnings are the product of its specific mix of electricity sales, energy-distribution operations, and even the source – coal, oil, natural gas or nuclear – of its generating operations. In recent years, PPL has methodically changed its focus, through a process its CEO calls “de-risking.” As recently as 2010, the majority of its revenues came from producing electricity and selling it into the volatile wholesale-power market. Through a series of acquisitions, the lion’s shares of PPL’s revenues now come from the more sedate regulated energy business. That’s provided the company with a more stable revenue stream, but it’s also pushed leverage higher, and it will tend to limit the profit upside when energy prices eventually strengthen.
There have been times when PPL’s earnings didn’t cover the dividend obligations. That worked out okay, and from a dividend-investor’s perspective, suggests the company is committed to maintaining its record of over six decades of uninterrupted quarterly dividends. PPL has twice in recent years sold new shares to raise cash for its acquisitions and other purposes.
There’s little doubt that PPL, because it tempered its profitability by tilting toward the safer regulated sector structure, enjoyed better profits in the past couple of years than it would have under its old energy-merchant format. For dividend investors, the key question is whether the company, which will face increased capital-expense requirements in coming years, will be able to maintain its current payout.
Of course, whenever we buy a security for its dividend, we’re also buying the underlying stock, with whatever risks the stock may carry. So it’s important, before committing to a stock, to check out its financial condition. Reading through its 10-K is a good idea, too.