Navigating Value and Income Opportunities in UGI Corporation: A Comprehensive Analysis

Mid Caps 0 replies 0 votes 1638 views Tags:  Dividend AristocratEnergy ProductsFinancial Analysisincome investingInvestingmarket trendsPortfolio ManagementStock performanceUGI CorporationValue Stocks
Amy Swift 9 months

The concept of growth investing can be exhilarating during favorable times, but it can become disheartening when faced with setbacks. Such is the situation that has arisen with Super Micro Computer (SMCI) this week. Despite surpassing expectations on Wall Street, the company's shares plummeted by 23% within a single day. Evidently, investors had projected more ambitious growth than the company could realistically achieve.

In light of these circumstances, I am inclined to advocate for maintaining a portfolio consisting of value-oriented stocks that offer substantial income potential, such as UGI Corporation (NYSE:UGI). Presently, the stock continues to exhibit weak performance, marked by a decline of 38% over the past year. In the subsequent sections, I will provide an update and elucidate the factors that position UGI as an attractive value stock in the current context, particularly for those seeking high income.

UGI, a prominent distributor and marketer of energy products in both the United States and Europe, serves portions of Pennsylvania and West Virginia within the U.S. market. Its portfolio encompasses assets in natural gas transmission, electric generation, midstream operations, propane services, and renewable natural gas generation. Notably, UGI achieved total revenue of $9.5 billion over the trailing 12 months.

While UGI's stock performance over the last year might suggest a crisis, a closer examination reveals a different story. This is underscored by the mere $3 million year-over-year decline in the company's EBITDA, which amounted to $1,076 million for the second quarter.

The decline in EBITDA can be attributed to increased EBIT from the AmeriGas propane segment due to enhanced margins. However, this was counterbalanced by reduced EBIT from the International, Midstream, and Utilities segments, as UGI grappled with elevated costs. In response to these results, management has provided full-year EPS guidance at the lower end of the $2.75 to $2.90 range.

Despite the immediate challenges posed by increased costs, the management is strategically positioning the company for future success through a focus on cost containment. Additionally, UGI is making substantial investments in growth, channeling $400 million into the utility business since the beginning of the year. Notably, this effort has translated into an 11,000 customer increase in the residential heating and commercial sectors.

The utilities segment is also displaying promising developments in the form of rate cases filed this year. These cases hold the potential for margin enhancement, countering the heightened costs that UGI has confronted. The filing encompasses a request for a $20 million revenue increase and a weather normalization adjustment. It is projected that these efforts could contribute positively to the top line by the first quarter of 2024.

As matters stand, UGI possesses a considerable financial foundation to support immediate projects, with total liquidity amounting to $1.8 billion, encompassing available borrowing capacity and cash on hand. Notably, the company has also diminished AmeriGas debt by $200 million in the last quarter, bolstering its resilience against financial covenants. Management is committed to further reducing the net debt to EBITDA ratio below 5x through additional debt repayment.

While UGI's strategy holds promise, it is not without potential risks. These include execution risk associated with the reshuffling of capital. Management's plans to divest certain natural gas and power marketing assets in Belgium and France, alongside the wind and solar business in the Netherlands, could potentially lead to temporary earnings dilution. Furthermore, an unexpectedly warm winter could result in decreased demand for natural gas, although the aforementioned normalization adjustment might help mitigate the impact of weather-related fluctuations.

Of significant interest to income-focused investors, UGI presently offers an enticing dividend yield of 6.1%, which is well-supported by a payout ratio of 52%. The company recently boosted its dividend by 4%, an action that maintains its Dividend Aristocrat status, having increased dividends for 35 consecutive years. As depicted below, the current dividend yield is the highest observed in over a decade.

It is pertinent to note that UGI garners A+ grades for yield and consistency, and a B score for dividend safety relative to peers within the Utilities sector, as indicated below.

Lastly, UGI's current valuation at $24.53 is compelling, with a forward price-to-earnings ratio (PE) of 8.8, significantly lower than its historical PE of 15.3. This valuation already accounts for various risks and challenges that UGI is confronting. Analysts' projections anticipate a 13% growth in earnings per share (EPS) for the coming year, followed by mid-single-digit growth in subsequent periods.

In conclusion, UGI presents a compelling proposition through its amalgamation of robust income potential and attractive valuation at the prevailing levels. While the stock has exhibited lackluster performance due to concerns over cost pressures, it is evident that management is actively addressing these issues by implementing measures such as cost controls and rate case filings. Given the substantial degree to which potential headwinds are reflected in the stock price, an attractive margin of safety is offered. Additionally, UGI maintains its status as a dividend aristocrat, supported by its recent dividend increase. Consequently, investors focused on value and income may find the current discounted price of UGI to be an advantageous opportunity.

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