PPL Update: Has The Story Changed?

As I write this piece, PPL Corporation (NYSE:PPL) lingers near $27.40 a share after having been below $27.00 for a period of May 17 through May 21. I have written two lengthier pieces on PPL that have laid out the bullish case for a long-term investor, but I wanted to put together a piece reviewing some recent developments for those who remain interested in the stock. I am still quite surprised that PPL has been lingering at these valuation levels for such an extended period of time; however, I do not think the long-term outlook for PPL has changed materially.

The Stock Issuance Overhang

In my previous piece, I discussed the possible issues effecting the valuation of PPL (Is It Time To Re-Evaluate PPL?), and in the piece, and particularly the comments, we saw a lot of interest in the specter of PPL raising an additional $1B in capital through an equity offering in 2018. In fact, we now know that PPL has agreed to issue 55 million additional shares at a price of $27.00 with an over-allotment of 8.25 million shares. Those who are paying even scant attention to PPL will notice that this total offering seems to be much higher than initially forecast. There is a change here though - it would appear that this issuance is effective through November 2019 and allows for equity capital issuances both this year and next, which totals potentially over $1.5 billion in the 18-month period.

Clearly, this development, while anticipated, has created a short-term valuation ceiling for the stock. It is no coincidence that PPL has traded towards this $27.00 price point since the announcement on May 8th, and it will likely affect the stock for the next 12 months through dilution and the understanding of the pricing for new shares holding any price rally in check. PPL has said it intends to use the funds for ��general corporate purposes�� and is likely in response to tax reform issues, and seems typical of other utilities trying to raise capital in a variety of ways. One highlight or silver lining here �� the issuance of debt with increasing bond yields would likely prove less attractive in the long run. While PPL is diluting its share price currently, it will keep its overall debt level more stable in an era of rising interest rates. This could prove beneficial to investors going forward.

Other Recent Factors to Consider

It appears that institutional investors have been adding some significant positions in PPL in the first quarter which makes sense given its valuation and attractive yield. I view this development as bullish for the stock as money is moving into position as it had reached attractive price valuations. PPL has also boasted an earnings beat in each of its last 4 quarters, and the Q1 earnings call/presentation seemed very positive in my review. You can view a more detailed presentation of Q1 here: PPL Corporation Reports First-Quarter Earnings.

PPL reaffirmed the target of 5-6% earnings growth per share through 2020 and seems to be targeting a very favorable earnings and dividend growth pattern through the end of the decade. The fears over UK regulation seem to be overblown, and currency risk is nearly entirely mitigated by a very aggressive currency hedging strategy. While this may prove a mistake if the terms turn out to be less favorable than market rates, the certainty provided should weigh very positively for utility investors. 2018 is hedged at 100% at $1.32 per pound, and 2019 at 100% for $1.39, and 2020 at 50% for $1.49 per pound. These hedged currency positions for the next two years should allow for the consistent growth forecast through 2020 (see: PPL Corporation 2018 Q1 - Results - Earnings Call Slides). I view this as very positive, given the concern over future earnings for the UK segment, a segment which will make up over half the earnings for PPL in 2018. Please note that PPL also stayed steady with its quarterly dividend at $.41 payable for investors of record by June 8th. These are all positive drivers in my mind, and suitable for an income producing utility investment.

Conclusions to Be Made

I still value PPL highly in my portfolio, and have been looking to extend my position as the stock price has declined �� particularly below $27.00. I do not think we will see any significant price rally in the next 12-month period as shares are issued, but as a long-term investor, I am content to value the stock according to its future potential and stability. A caveat would be a flight to safety in some unforeseen economic turmoil in the short term �� towards quality equity names and reliable yields - another reason I like the safety of a utility stock at this time. In this vein, I still am bullish on PPL and continue to rate the stock a ��buy��. My price target remains around the overall street consensus of +/- $32.00, but I do not believe we may see sustained pricing above this level until 2019. I am also looking heavily at other beaten-down utilities, including Dominion (NYSE:D) and Southern Company (NYSE:SO), and may initiate some articles on these names in the near future. Let me know your thoughts and ideas on this stock �� do you see it the same way?

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Disclaimer: The opinions and the strategies contained herein are not intended to be official financial advice nor an official recommendation to buy or sell a security. Please evaluate each stock according to your own research and risk tolerance.

Disclosure: I am/we are long PPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.