Company Description: UGI Corp. operates propane distribution, gas and electric utility, energy marketing and related businesses through subsidiaries.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these 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 discount to only 3.) above. The stock is trading at a 19.9% premium to its calculated fair value of $25.78. 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 24 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) or Treasury bond? 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 $649 is below the $1,100 target I look for in a stock that has increased dividends as long as UGI has. If UGI grows its dividend at 6.5% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 4.0%. UGI earned a check for the Key Metric 'Years to >MMA' since its 4 years is less than the 5 year target.
Memberships and Peers: UGI is a member of the Broad Dividend Achievers™ Index. The company’s peer group includes: Nicor Inc. (GAS) with a 3.5% yield, New Jersey Resources Corp. (NJR) with a 3.2% yield, and ONEOK Inc. (OKE) with a 3.0% yield.
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 stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $26.22 before UGI's NPV MMA Differential increased to the $1,100 minimum that I look for in a stock with 24 years of consecutive dividend increases. At that price the stock would yield 3.89%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,100 NPV MMA Differential, the calculated rate is 8.1%. This dividend growth rate is above the 6.5% used in this analysis, thus providing no 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. Not having any negative free cash flows over the last 10 years is virtually unheard of for a utility.
The company is trading at a premium to my $25.78 calculated fair value. However, I will watch it closely for an appropriate entry point since it is the highest rated stock in a sector in which I am trying to increase my exposure.
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 my income holdings here.
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