PPL (NYSE: PPL) is an electric utility company whose stock price has been treading water the past year. While the market as a whole is up over 12%, PPL stock has managed to just eek out a 2% gain. And earnings are not an issue.
So what could be holding this stock back from growing? Today we are going to look at what potential issues investors feel PPL faces and whether or not they are reasons to avoid the stock.
Trying To Find What Is Holding PPL Stock Back
As I mentioned, PPL stock has been treading water. The first thing investors look at when this happens is earnings. In their latest earnings report, earnings per share came in at $0.52 which beat estimates by $0.03. Revenues came in at $1.73 billion, missing estimates by $60 million. This was a drop in revenue by 3.5% compared to last year.
On the surface, nothing looks like it should concern investors. In fact, earnings have been growing ever since PPL spun off Talon Energy.
So if it’s not earnings that are an issue what is it? There are only two issues I see at play with this stock. The first is exchange rate and currency risk.
PPL does 70% of its business in the United States. The other 30% of earnings comes from the United Kingdom. As a result of this, there can be fluctuations in earnings based on the value of the US Dollar versus the Great Britain Pound.
The other issue is debt. While not much debt is due in the next few years, PPL does have a sizeable chunk of debt that is coming due both in 2020 and 2021.
Are These Issues A Concern?
The thing I don’t understand is why the stock is being punished for these 2 issues. First, PPL hedges itself against currency risk. They have hedges in place through 2020 and if need be, they can hedge more after that.
So while there is a risk there, the company is making sure that risk is greatly minimized and will have very little impact on earnings.
When it comes to debt, we have over 2 years before a large portion of debt needs to be repaid. That is plenty of time to pay it down or issue new debt with a future due date to pay off this debt.
So to this investor, these issues aren’t a reason to avoid this stock.
Why You Should Invest In PPL
So should you be an investor in PPL? I think so.
The company is working hard to enhance its smart grids so that it can better serve its customers in the years to come. In addition, the company estimates that it will be able to grow earnings annually between 4.5% and 6%. Add in the 4% dividend and you are looking at a 10% return on a utility company. Not too shabby. It reminds me of Duke Energy who I recently wrote about.
PPL expects it will be able to grow its dividend by 4% annually through 2020 as well.
PPL has a lot going for it. I can’t wrap my head around why so many investors are scared of this stock. There are some risks, but the company has done its due diligence to keep these risks at bay.
For me, I only see potential with a hint of downside risk. And when I can invest in a stable company and earn 10% annually, I jump at the opportunity.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.