PPL's Adjusted Dividend Sets Foundation for Reliable Long-term Growth

Earlier this year, PPL cut its dividend by around 50%, an expected move following the firm's divesture of its U.K.-based utility operations that previously generated roughly half the company's earnings.

This payout reduction better aligned the dividend with the company's remaining operations in Pennsylvania and Kentucky and to a much more comfortable level that can support future dividend growth.

In fact, according to management, investors can expect a dividend hike as early as this summer following the pending acquisition of the Narragansett Electric Company in Rhode Island, a regulated utility being purchased with some of the U.K. divestiture proceeds.

We estimate the dividend could increase around 10%, allowing the payout ratio to rise closer to PPL's 60-65% target range.

In addition to restoring dividend growth, the Narragansett transaction will help PPL accelerate the firm's decarbonization goals by effectively reducing its earnings exposure from coal-generated power to around 15%. 

PPL has also taken action to strengthen its balance sheet, using a material amount of the cash generated from the U.K. divestiture to pay down debt and reinforce its A- credit rating.

As a result of the financial flexibility gained from an improved balance sheet and the conservatively rebased dividend, we are upgrading PPL's Dividend Safety Score to Safe.

 

However, following this summer's anticipated dividend raise, future increases are likely to be more muted and in line with the firm's earnings growth likely in the mid-single-digit range.

Overall, PPL has repositioned itself on a more solid foundation and should continue to generate reliable cash flow and offer a well-covered dividend as a pure-play U.S. regulated utility.

We will monitor progress on the Narragansett transaction and provide an update on any news that could alter PPL's long-term outlook.