PPL (PPL) segregated its unregulated business from its regulated business in 2015. The strategic move may have a positive impact on the company’s earnings. It has increased its 2016 EPS (earnings per share) guidance from $2.05–$2.25 to $2.15–$2.25.
Investors may see dividend growth due to this earnings growth. Companies with higher exposures to regulated operations tend to pay regular dividends due to their stable business models.
PPL has a high dividend yield of 4.4% as of December 24, 2015. Utilities companies (XLU) have an average dividend yield of 4%. Leading utilities company Duke Energy (DUK) has a higher yield than PPL at 4.7%. Duke Energy and PPL both have strong focuses on their regulated operations.
In contrast, utilities with more business exposure to unregulated operations tend to have volatile earnings. Dividends from these utilities have been falling for the last few years. Exelon (EXC) and FirstEnergy (FE) both have large exposures to their unregulated businesses and have seen falling revenues in the last couple of years.
Conservative investors may prefer utility stocks because they offer stable growth and attractive dividend yields. But in the last couple of years, energy efficiency has improved significantly so that the demand for electricity has exhibited a somewhat flat pattern. As a result, the operating cash flows of utilities companies (XLU) have taken a beating, hampering capital distribution. However, PPL’s complete focus on regulated operations can likely bring stable cash flows in the future.