FirstEnergy Expects to Resume Dividend Growth Later This Year; Reports Earnings

We are reaffirming our $40 per share fair value estimate after FirstEnergy reported 2022 full-year earnings of $2.41 per share, down from $2.60 in 2021. Our narrow moat and stable moat trend remain unchanged.

Management initiated 2023 operating earnings guidance of $2.44-$2.64 per share, in line with our $2.49 estimate. Management also increased its dividend payout ratio target to 60%-70% and said it expects to resume dividend increases later this year. This is consistent with our estimate for a 2.6% increase in the dividend from 2022.

The higher payout ratio will likely accelerate dividend growth beyond our initial estimates. We now expect dividend growth more in line with our earnings growth estimate, which is at the bottom half of management’s 6% to 8% annual earnings growth target through 2025. Dividend policy has no effect on our fair value estimate. Management expects to offset $0.38 per share of pension headwinds in 2023.

Earnings in 2022 benefited from regulated investments, favorable weather, and lower interest expense. Offsetting these benefits were accounting changes, Ohio rate credits, and equity dilution. Rate cases across key subsidiaries increases regulatory risk this year.

In early February, FirstEnergy announced the sale of an additional 30% ownership stake in FirstEnergy Transmission for $3.5 billion to Brookfield Super-Core Infrastructure Partners. FirstEnergy plans to use the proceeds from the transaction to pay down debt and fund additional investment opportunities.

Overall, we like that the transaction supports a stronger balance sheet and additional regulated growth investments, but it comes at a cost of limiting investors’ share of value from what we think is the crown jewel of FirstEnergy. Electric transmission has a favorable regulatory framework with formula rates that allow recovery of expenses and a return on investment.