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Many high quality corporations have been thrown out with the bathwater through the fairness market volatility over the previous yr. Whereas there are many excessive yielding names on the market that warrants consideration, I proceed to imagine in constructing a well-diversified dividend ladder to reduce threat in anybody sector.
This brings me to UGI Company (NYSE:UGI), which stays enticing at $37, sitting properly beneath its 52-week excessive of $47. On this article, I spotlight why UGI could also be a terrific alternative for dividend buyers searching for a inventory with a robust monitor report of capital returns.
Why UGI?
UGI Company is a conglomerate with a various set of companies, together with propane distribution, electrical and pure gasoline utility, and power advertising. This features a utility in Pennsylvania, LPG distribution each domestically (by way of AmeriGas) and overseas, power midstream property in Pennsylvania, Ohio, and West Virginia, and renewable pure gasoline advertising in 12 states.
This various enterprise mannequin is a key differentiator for UGI, because it permits administration to spend money on classes with the very best potential returns. One such initiative is the growth of the corporate’s propane distribution enterprise, which incorporates constructing new storage services and buying smaller propane distributors. Administration reiterated its dedication to rising this enterprise throughout its current convention name:
As you’re conscious, we’re the main propane distributor within the U.S., however this can be a extremely fragmented market with near 4,000 unbiased retailers who maintain in combination greater than 3/4 of the market, unique of regional and nationwide retailers. We intend to realize a better market share, improve volumes and develop EPS by roughly 8% by fiscal 2026.
In the meantime, UGI is not exhibiting any indicators of slowing down, as income grew by 13% YoY to $2.9 billion in its fiscal fourth quarter. Administration additionally invested a report quantity of capital ($562 million) throughout that quarter, and added over 14,000 residential and business heating clients in its Utilities phase. Notably, UGI is benefiting from power strains in Europe, because it noticed larger LPG quantity and margins in Northwest Europe, with common propane value growing by 53% over final yr.
Trying ahead, administration is searching for to shed some lower-growth power advertising companies in Europe, notably within the UK, France, Belgium, Netherlands. This might assist the corporate to refocus assets in larger development areas, as talked about by administration within the final convention name:
We function in a constructive regulatory environments in each Pennsylvania and West Virginia that assist the modernization of infrastructure to advertise security, reliability and development. With over 18,500 miles of pipeline and an extended monitor report of enticing buyer development, now we have a terrific runway of alternatives to deploy capital.
Our plans to take a position roughly $2.4 billion over the subsequent 4 years show our dedication to investing within the enterprise and infrastructure substitute. Our workforce continues to deploy report quantities of capital, each safely and successfully. As well as, with these investments, there may be minimal regulatory lag as we recuperate roughly 90% of the prices incurred in lower than 12 months at enticing charges of return.
Administration additionally has a eager eye on leverage with a goal leverage within the 3x to three.5x vary, which is affordable for a utility firm. UGI at present has a web debt to TTM EBITDA ratio of three.2x, which inserts squarely inside that vary.
Importantly, UGI pays a protected 3.9% dividend yield that is properly coated by a 49% payout ratio. The dividend additionally has a 7.6% 5-year CAGR and UGI is a dividend aristocrat, with 35 years of consecutive annual raises underneath its belt. As proven beneath, the dividend yield at present sits at one among its highest factors over the previous decade.
(Be aware: the next chart reveals TTM Yield, whereas the Ahead Yield is 3.9%)
UGI Dividend Yield (YCharts)
UGI additionally scores A and B scores for dividend security, ,development, yield, and consistency, as proven beneath.
UGI Dividend Grades (In search of Alpha)
Lastly, UGI continues to commerce in worth territory on the present worth of $37 with a ahead PE of 12.4, sitting properly beneath its regular PE of 15.3. This seems to be too low cost for UGI, contemplating the standard of the diversified enterprise and with analysts anticipating 6% to 12% annual EPS development over the subsequent 2 years. Analysts have a median worth goal of $44.50, translating to a possible 24% whole return from the current degree.
UGI Valuation (FAST Graphs)
Investor Takeaway
UGI is a dividend aristocrat that has persistently elevated its payout over three a long time. The corporate has a well-diversified enterprise mannequin with enticing development prospects. It additionally has an affordable debt degree that enables administration to deploy capital in the direction of excessive return initiatives. Lastly, the inventory is at present buying and selling at a major low cost to its historic valuation and supplies a gorgeous whole return potential for dividend development buyers.
