UGI Can Fuel Long-Term Gains

3/3/2014


  Recent Price
$44
  Dividend
$1.13
  Yield
2.6%
  P/E Ratio
17
  Shares (millions)
116
  Long-Term Debt as % of Capital
49%
  52-Week Price Range
$44.47 - $35.13

Not since 2010 has our Long-Term Buy List featured a utility stock. We present the Top 15 Utilities Portfolio (www.DowTheory.com/go/Top15) to serve investors thirsty for yield, going with the separate portfolio mostly because few utilities offer the blend of operating momentum and fundamental strength we require before adding an individual stock to one of our recommended lists.

However, Top 15 component UGI ($44; UGI) joined the Long-Term Buy List in the Feb. 17 issue, reflecting solid growth prospects, an attractive valuation, and reliable dividend growth. The utility seems well-positioned to benefit from the improving U.S. housing market, Europe's recovery, and continued domestic production of cheap natural gas from shale deposits.

UGI's per-share profits surged 36% in the 12 months ended December on 9% sales growth; S&P 1500 Utility Sector peers averaged growth of just 2% for earnings and 7% for revenue. Looking further out, UGI expects to generate long-term earnings growth of 6% to 10%. Scoring above 90 for both sector-specific ranks, UGI is a Long-Term Buy.

Business breakdown

Over the past year, UGI's operating profit margins rose across all four units, with the biggest gain (to 13.1% from 8.0%) coming from its biggest business, AmeriGas. The largest retail distributor of propane in the U.S., AmeriGas (44% of sales for calendar 2013, 49% of operating income) sells the fuel through 2,100 locations in 50 states. Rising volumes and higher fuel prices fueled the recent growth.

The utility (11% of sales, 23% of earnings), by far UGI's highest-margin business, reaches about 600,000 natural-gas customers and 60,000 electric customers in Pennsylvania. In the years leading up to the recession, the utility relied on new housing developments to drive customer growth. When the housing market imploded, UGI turned its efforts to converting customers in its area to natural gas; that strategy helped UGI expand its customer base throughout the downturn. While management still sees plenty of opportunity for conversions, the housing market is gaining strength.

The international business (30%, 16%) distributes propane and markets energy in 16 European countries. It has also forged partnerships in the Czech Republic and China.

The midstream and marketing (14%, 11%) unit grew sales 27% in the past year, as UGI began to see the payoff of past investments. The unit is building new pipelines that will connect its marketing and utility customers to the Marcellus Shale formation.

Conclusion

UGI has paid a dividend without interruption since 1885 and has raised the payout in 26 straight years. Over the past five years, UGI grew its dividend at an annualized rate of 8%, twice the average for S&P 1500 utilities.

The stock has generated a total return of 29% in the past year, ahead of the 16% average for S&P 1500 utilities. Yet UGI still scores above 80 for Value and trades at 17 times trailing earnings, an 11% discount to its gas-utility peer group.

An annual report for UGI Corp. is available at 460 N. Gulph Road, King of Prussia, PA 19406; (610) 337-7000; www.ugi.com.

UGI
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '13
1.06
vs.
0.88
15%
42.29
-
37.88
17 - 15
Sep '13
-0.06
vs.
-0.99
12%
43.24
-
38.02
18 - 16
Jun '13
0.13
vs.
-0.03
7%
42.11
-
36.43
19 - 16
Mar '13
1.51
vs.
1.18
5%
38.46
-
32.90
20 - 17
           
Year
(Sep.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2013
7.19
2.45
1.09
43.24
-
30.15
18 - 12
2012
6.52
1.90
1.05
31.87
-
24.07
17 - 13
2011
6.09
2.10
1.01
33.53
-
25.81
16 - 12
2010
5.59
2.25
0.85
29.00
-
23.18
13 - 10
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
81
67
82
46
47
65
64

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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