Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
UGI is trading at a premium to all four valuations above. Since UGI’s tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 30.5% premium to its calculated fair value of $20.60. UGI did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
UGI earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. UGI earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1885 and has increased its dividend payments for 23 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $614 is below the $1,200 target I look for in a stock that has increased dividends as long as UGI has. If UGI grows its dividend at 5.7% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 3.71%. UGI earned a check for the Key Metric ‘Years to >MMA’ since its 2 years is less than the 5 year target.
Other: UGI is a member of the Broad Dividend Achievers™ Index.
Conclusion: UGI did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks UGI as a 3 Star-Hold.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $21.54 before UGI’s NPV MMA Differential increased to the $1,200 minimum that I look for in a stock with 23 years of consecutive dividend increases. At that price the stock would yield 4.18%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,200 NPV MMA Differential, the calculated rate is 7.9%. This dividend growth rate is well above the 5.7% used in this analysis, thus not providing any margin of safety. UGI has a risk rating of 1.75 which classifies it as a medium risk stock.
UGI offers a unique business mix of low-risk regulated gas distribution business along with a more volatile unregulated propane marketing businesses. The gas utility serves about 1,000,000 customers and the electric utility serves about 62,000 customers. The utility owns two coal-fired stations that supply more than half of its electricity, with the remainder purchased on the open market. The non-utility portion of the business has certainty helped its financials. Its debt to total capital of 43% and free cash flow payout of 45% are low for a utility. Also, not having any negative free cash flows over the last 10 years is virtually unheard of for a utility. Unfortunately, this has been baked into the share price with the company trading at more than 30% above my buy price of $20.60. I will watch UGI and wait for a better entry point. For additional information, including the stock’s dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in UGI (0.0% of my Income Portfolio). See a list of all my income holdings here.
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