UGI Affirms Dividend Commitment Amidst Ongoing Strategic Review

During last week's earnings call, UGI refrained from providing an official update on the ongoing strategic review focused on divesting its North American propane business (AmeriGas), which is intended to result in a more stable earnings stream and predictable future.

However, we spoke with management today and asked several questions that, while not enough to trigger upgrading UGI's Dividend Safety Score, inspired a little more confidence in the dividend's security than we had before the call.

UGI acknowledged the importance of the payout to its shareholders and stated that reducing the dividend alongside the potential propane divestiture is not currently under consideration.

That said, with significant changes coming and the absence of finalized plans, we're reaffirming UGI's Borderline Safe Dividend Safety Score until the strategic review concludes and we have more clarity on the structure and outlook of the business.

For a more detailed analysis of the strategic review's potential impact, we recommend you read the note we published on November 10th.

Following a sale or spinoff of AmeriGas, which accounted for nearly 25% of UGI's operating income this past year, the company's payout ratio will jump further above its target range of 35% to 45%.

And if the remaining international propane businesses were eventually exited, we estimate UGI's payout ratio could exceed 70%, holding all else equal.

Although we believe UGI's payout ratio would remain at a level in line with other regulated utilities, management has yet to suggest what level of dividend coverage it would be comfortable operating with after the strategic review concludes.

Fortunately, UGI shouldn't need to put a low payout ratio in place to prioritize debt reduction. Selling or spinning off AmeriGas will help lower debt, and management told us they are comfortable with UGI's post-separation leverage ratio gliding into their target range in due time.  

Overall, our conversation with management gave us more confidence that UGI intends to protect its dividend even if the cash flow from AmeriGas goes away due to a separation transaction.

A sale would likely be preferable to maximize AmeriGas's value since few investors will likely be interested in receiving shares in a highly leveraged propane business with limited growth prospects. This uncertainty could continue weighing on UGI until the review concludes.

We'll continue to monitor for updates on the strategic review and provide updates accordingly. If we owned shares of UGI, we would continue holding.