Is UGI's Dividend Safe Despite Propane Market Headwinds?

Several challenges in UGI's non-regulated propane business have contributed to the firm's stock dropping nearly 25% this year, compared to single-digit losses for most other utility firms.

Unique amongst its peers, UGI generates roughly 65% of profits from non-regulated (but generally stable) businesses like global propane distribution and some midstream assets located in low-cost shale formations, primarily in Pennsylvania.

Propane is responsible for roughly 40% of UGI's earnings through its AmeriGas (in all 50 U.S. states) and UGI International (Europe) business lines.

The costs to transport propane, which is mostly delivered by truck, have remained elevated thanks in part to an ongoing driver shortage. 

Meanwhile, a warmer-than-usual winter, energy conservation efforts in Europe following Russia's attack on Ukraine, and cheaper natural gas alternatives in some markets have led to slightly lower sales volumes.

While these issues appear to be short-term in nature and shouldn't have a lasting effect on the business and its long-term transition to renewable energy, they have highlighted the somewhat higher volatility investors can expect relative to more pure-play regulated utility companies like Duke Energy.

In recognition of UGI's earnings being less stable than its more regulated peers given the unusually challenging market environment for propane today, we are downgrading the firm from 99 to 90 within our Very Safe bucket.

 

That said, investors should not interpret this action as a reason to sell their shares. In fact, for those who believe in UGI's long-term outlook, now could prove a timely opportunity to give the stock a look with UGI boasting a historically attractive dividend yield.

Despite propane market headwinds, UGI boasts a healthy payout ratio of around 50% and a strong balance sheet. And the firm looks poised to continue balancing a stable payout (100+ years of uninterrupted dividends) and investments in a cleaner energy future to deliver around mid-single-digit EPS and dividend growth over the next few years.

We recommend revisiting the Outlook we published for UGI for more details.

As always, we'll continue to monitor UGI and provide updates as needed.