PPL’s dividend outlook
PPL’s (PPL) management expects fair annual earnings growth of 5%–6% through 2020, which will likely facilitate its dividend growth. PPL’s business mix improved in the last few years. Its relatively risky merchant generation business separated and it became a pure-play regulated utility.
PPL’s operations in the United Kingdom contribute more than half of its consolidated earnings. The rest of its earnings come from Pennsylvania and Kentucky. Its transmission and distribution operations in both of these states will likely boost its earnings growth due to increased capital spending.
The United Kingdom’s Brexit referendum could have a negative impact on PPL’s cash flows due to its large exposure to the United Kingdom and volatile exchange rates. However, the company’s hedging strategies and its relatively stronger domestic performance are expected to offset the impact to some extent.
PPL’s geographic diversification could offer a strategic benefit for it after the Brexit blues are over and the pound is stable. The mix of operations in the United Kingdom and the US present PPL with regulatory and customer diversification. A supportive regulatory framework in the United Kingdom offers a comparatively higher return on equity to PPL than the US average.
The above chart shows the comparative stock price movement of PPL and broader utilities. In the last five years, PPL stock largely tracked the Utilities Select Sector SPDR (XLU) and significantly underperformed broader markets (SPY).
Including dividends, PPL’s returns in the last five years were 11% compounded annually. During the same period, XLU returned 13% and SPY returned 14% compounded annually.
You can read a comparative analysis of the top-yielding utility stocks among SPX Utilities in Market Realist’s series High-Dividend SPX Utilities Today: A Toe-to-Toe Analysis.