In a year full of surprises, we recommend that investors be selective with their utility selections;...
PPL Corporation: A Solid Ute for a Diversified Portfolio
06/20/2019 8:55 am EST
Our goal is to have 30 stocks in our portfolio; we currently have 28. For those not familiar with our strategy, a review of my special affinity for the number 30 may be useful, explains Neil Macneale, editor of the specialized advisory service, 2-for-1 Stock Split Newsletter.
First, 30 months equals 2½ years. The David Ikenberry study that inspired me 23 years ago described the outperformance of splitting stocks over a two to three year period, after which the “stock split advantage” dissipates. Thus, 30 months becomes an ideal holding period for our stocks on a ladder from newest to the oldest.
More from Neil Macneale: Here's a Split to Bank On
Second, mathematicians tell us that just 30 positions, spread across market sector and market cap, offers more than enough diversity to completely eliminate all risk except market risk. In other words, a diverse portfolio of 30 stocks can be seen as a proxy for the entire market.
With no qualified split announcements in May, I go to the market and look for companies with many of the same characteristics as our 2 for 1 portfolio winners.
This month I’m going to go with a utility that meets most 2 for 1 criteria and also gives us some international exposure in addition to the typical utility stability and good dividends.
Headquartered in Allentown, PA, the PPL Corporation (PPL), through its fully owned subsidiaries, provides electricity to portions of the United Kingdom, Pennsylvania, Kentucky, Virginia and Tennessee and natural gas to portions of Kentucky.
The UK operations provide approximately 53% of earnings. All operations are regulated. The permitted return-on-investment in the UK is significantly higher than is typical for the US, and will remain so for at least the next several years at which time rates of return will be up for review in the UK starting in 2023.
See also: JM Smucker: Pet Food to Peanut Butter
If we continue to add non-splitting stocks to the portfolio, doing without the stock split advantage, there has to be some off-setting benefit. In the case of PPL, we get a very low volatility, high dividend paying stock that might serve as an “anchor” for the portfolio even if its price appreciation falls below our average.
With a PE ratio of 11.9 and a price-to-book ratio of 1.8, PPL is quite reasonably priced compared to its peers. The 5.4% dividend has been slowly increasing and should be deemed relatively secure. This is a huge company.
PPL ranks as the 8th largest electric utility in the US, with a market cap of over $22B, so it’s not exactly an under-the-radar stock. Nevertheless, I could find no significant scandals or bad press to put me off.
Sustainalytics, Inc., a business that ranks Environmental, Social, and Governance characteristics of companies, has an ESG ranking on PPL that has improved markedly over the last five years. I would prefer to be adding a split, but a solid utility will keep the portfolio moving for now.
Related Articles on UTILITIES
Reaves Utility Income Fund (UTG) is a closed-end fund that owns utility sector stocks and pays an at...
Stock price volatility at Sempra Energy (SRE) contrasts sharply with the steady business performance...
Our best performing utility holding is NextEra Energy (NEE), which generates most of its electricity...