Attractive Growth Opportunities for PPL

Andrew Bischof: PPL is a regulated utility trading at a 20% discount to our fair value estimate in an industry we view as currently fairly valued. PPL has two key segments: one in the U.K. and one in the U.S. The international regulated delivery segment operates distribution networks providing electricity service to customers in the U.K. The domestic unit consists of Pennsylvania and Kentucky utilities that are involved in regulated electricity generation, transmission, and distribution.

We believe the market is overly concerned about PPL's exposure to the U.K. The U.K. political environment is increasingly putting pressure on the region's regulatory conditions as concerns around high electricity prices have raised the ire of consumers and politicians.

We believe the bulk of the pressure will remain on the country's electricity suppliers, which account for a majority of the consumer electricity bill. PPL owns transmission and distribution assets only and does not own an electricity supplier. We recently lowered our long-term rates of return for the unit, and we believe the market's assumptions are overly pessimistic about the long-term profitability of the unit. While returns will likely be lower, we expect a regulatory construct that will support investment in the U.K's infrastructure.

PPL has attractive regulated growth opportunities that could produce 5.5% earnings growth in our five-year outlook. The company benefits from operating in constructive domestic regulatory jurisdictions, with nearly 80% of PPL's planned capital expenditures having little or no regulatory lag. During the next five years, PPL plans to invest nearly $16 billion at its regulated utilities, including wide-moat transmissions investments, supporting our earnings growth outlook.

In our view PPL's valuation is attractive, trading at a 20% discount to our $35 per share fair value estimate and yielding 6%, a full 150 basis points above the utility peer average. We forecast the dividend to grow 4% annually. We believe market concerns over the U.K. offer investors an opportunity to pick up a narrow-moat utility with sound regulated utility operations with a very healthy dividend yield.