Why UGI Corporation (UGI) is a Compelling Value Stock
Growth investing can be fun when everything is going right but can be downright depressing when the wheels fall off. Such appears to be the case with Super Micro Computer (SMCI) this week, when the shares dropped by 23% in a single day despite beating Wall Street expectations. In this case, it seems that investors were baking in more growth than the company could chew off.
That’s why I’d rather stick with a portfolio of value and income-heavy stocks like UGI Corporation (NYSE:UGI). I last covered UGI here back in June, discussing its safe payout ratio and forward growth prospects. The stock continues to trade weakly, and as shown below, currently sits 38% below where it was a year ago. In this piece, I provide an update and discuss what makes UGI a terrific value stock at present levels for high income, so let’s get started!
UGI Stock (Seeking Alpha)
Why UGI?
UGI is a distributor and marketer of energy products in the U.S. and Europe. In the U.S., it serves parts of Pennsylvania and West Virginia, and its assets include natural gas transmission, electric generation, midstream and propane services, and renewable natural gas generation. Over the trailing 12 months, UGI generated $9.5 billion in total revenue.
It would seem as if the sky was falling for UGI based on its share price performance over the past 12 months, but that simply does not appear to be the case. This is reflected by the company EBITDA declining by just $3 million YoY to $1,076 million for the second quarter.
This was driven by higher EBIT stemming from the AmeriGas propane segment (due to higher margins), offset by lower EBIT from the International, Midstream, and Utilities segments as UGI has had to contend with higher costs. These results prompted management to give full-year EPS guidance at the low end of its $2.75 to $2.90 range.
Despite near-term headwinds around costs, management is positioning the company for the future by focusing on cost containment. It’s also investing in growth with $400 million in capital deployed since the start of the year into the utility business, which grew by 11,000 new residential heating and commercial customers over the same timeframe.
The utilities segment is also seeing progress around rate cases filed this year, which could lead to margin improvement to offset the higher costs that UGI has seen this year. The filing includes an ask for a $20 million revenue increase as well as a weather normalization adjustment, which could begin contributions to the top line in the first quarter of 2024.
Meanwhile, UGI maintains plenty of capital to fund near-term projects as it carries $1.8 billion worth of total liquidity comprised of cash on hand and available borrowing capacity. It also reduced debt at AmeriGas by $200 million last quarter, thereby giving it additional buffer against financial covenants, and management plans to get its net debt to EBITDA ratio back down below 5x with further debt paydown.
Risks to UGI include execution risk around capital reshuffling, as management plans to divest certain natural gas and power marketing assets in Belgium and France and the wind and solar business in the Netherlands. This could result in near-term dilution to earnings, as management deploys the future proceeds into other projects. In addition, a warmer-than-expected winter could also reduce natural gas demand, but the aforementioned normalization adjustment could help with future fluctuations in seasonal weather patterns.
Importantly for income investors, UGI currently pays an appealing 6.1% dividend yield that’s well covered by a 52% payout ratio. UGI recently raised its dividend by 4%, and this enables it to continue its Dividend Aristocrat status with 35 years of dividend increases under its belt. As shown below, the current dividend yield is the highest in over 10 years.
(Note: The following chart shows the TTM yield. Forward yield is 6.1%)
As shown below, UGI also scores A+ grades for yield and consistency and a B score for dividend safety relative to the rest of the Utilities sector.
Lastly, UGI currently offers compelling value at the current price of $24.53 with a forward PE of 8.8, sitting far below its normal PE of 15.3. The current valuation already bakes in plenty of risks and headwinds for UGI, which may improve next year with the aforementioned initiatives. Analysts also expect 13% EPS growth next year, followed by mid-single-digit growth thereafter.
Investor Takeaway
In summary, UGI offers a compelling mix of high income and deep value at current levels. The stock has been trading weakly all year due to concerns around cost pressures, but it appears that management is taking steps to resolve these issues, including cost controls and rate case filings. Lastly, with plenty of headwinds already baked into the share price, the stock offers a good margin of safety and remains a dividend aristocrat with its recent dividend bump. As such, value and income investors may do well to look at UGI at the current discounted price.
Analyst comment
Positive news. UGI Corporation is seen as a compelling value stock due to its strong dividend yield, low PE ratio, and potential for future growth. Despite near-term headwinds, management is addressing cost pressures and taking steps to optimize the business. Analysts expect EPS growth next year. The market is likely to respond positively to this analysis, leading to an increase in UGI’s stock price.