UGI: A Dividend Aristocrat To Consider For Your Portfolio (NYSE:UGI)

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Gas storage tanks at sunset.

Iurii Garmash/iStock via Getty Images

Introduction

As a dividend growth investor, the current volatility serves as an opportunity. With stock indices significantly lower year to date, investors can find great companies for a lower price. I analyze both the stocks in my portfolio as well as stocks that are on my watchlist and I have not added them to my dividend growth portfolio just yet.

One of the sectors that sometimes challenges me is utilities. On the one hand, companies there are very stable and predictable, yet on the other hand, growth there is limited. Therefore, I watch companies like UGI (NYSE:UGI) and Avista (AVA) who combine regulated utility businesses with non-regulated businesses. This article will analyze UGI.

I will analyze the company using my methodology for analyzing dividend growth stocks. I am using the same method to make it easier for me to compare analyzed stocks. I will look into the company’s fundamentals, valuation, growth opportunities, and risks. I will then try to determine if it’s a good investment.

According to Seeking Alpha’s company overview, UGI Corporation distributes, stores, transports, and markets energy products and related services in the United States and internationally. The company operates through four segments: AmeriGas Propane, UGI International, Midstream & Marketing, and UGI Utilities.

UGI Corporation logo.svg

Wikipedia

Fundamentals

Sales of UGI have grown by more than 40% over the last decade. However, sales growth has been very erratic and cyclical because only one-third of the sales come from the regulated stable business. Still, the company manages to grow in the long term. UGI grows both organically by expanding the business and through M&A where it uses its cash flow to acquire four companies in the last three years, and other stakes in different projects. Going forward, the consensus of analysts, as seen on Seeking Alpha, expects UGI to keep growing sales at an annual rate of ~3% in the medium term.

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Data by YCharts

The company’s EPS (earnings per share) may be a bit misleading as the company has enjoyed a one-time increase in income. Therefore, I prefer using the adjusted non-GAAP figure which shows a 140% EPS increase in the last decade. The EPS growth is more impressive than the sales growth since the company has more than doubled its margins which supported the EPS growth despite a higher share count. Going forward, the consensus of analysts, as seen on Seeking Alpha, expects UGI to keep growing EPS at an annual rate of ~5% in the medium term.

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Data by YCharts

The company is a dividend aristocrat with a track record of over 30 annual dividend increases in a row. At the moment UGI offers a safe 3.55% dividend yield with a payout ratio of 19%. However, the real payout when using non-GAAP earnings is closer to 50%. The company in the latest earnings report gave another assurance of its commitment to the dividend and its long-term intention to keep raising it by ~4% annually.

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Data by YCharts

The number of shares outstanding has been increasing significantly over the last decade. The reason for the increase was the company’s acquisition that was paid for with stock. Share issuance dilutes shareholders and should be used with caution. I believe that while UGI doesn’t buy back its stock, its ordinary share issuance is insignificant and the major issuance is done for M&A, which is accretive to the bottom line.

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Data by YCharts

Valuation

The company’s P/E (price to earnings) ratio has declined significantly in the last three months. At the moment shares of UGI are selling for 13.3 times the estimated 2022 EPS, and it is an attractive valuation compared to the last twelve months. I believe that paying 13 times earnings for a dividend aristocrat with a long track record of execution is attractive.

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Data by YCharts

The graph below from Fastgraphs is another sign that UGI is attractively valued at the moment. The graph shows how for close to a decade, shares have been trading above the average P/E ratio of 15.4. Since the pandemic shares have been more attractively valued, and lately we have another drop in the share price, which again offers us an attractive valuation for UGI.

Analysis

Fastgraphs

To conclude, UGI combines decent fundamentals with an attractive valuation. The company grows steadily its sales and EPS, and it utilizes the cash flow to pay an ever-growing dividend payment. This great dividend growth package comes at a valuation that I find attractive, and the average valuation also implies that the current valuation is attractive.

Opportunities

Diversification is a key growth opportunity as it allows the company to be a better capital allocator. The reason for that is that the company operates several businesses and it can use the cash flow from all of its businesses to the one where the opportunity is most promising. The company has a regulated utility business, midstream, international utility, and propane business.

Another growth opportunity is the rise of renewable energy. Renewables enjoy significant regulatory push, and consumers are willing to pay for clean energy. UGI has already begun investing in this segment, and it is expected to continue to do so. In February, it entered an agreement with Global Clean Energy Holdings to purchase and distribute renewable LPG in California, and in April, it acquired a 33% equity interest in Ag-Grid Energy, a renewable energy producer with projects in the US.

The current price offers enough margin of safety in my opinion. The company is trading for a valuation that is roughly 15% lower than the average valuation. In times of volatility and uncertainty, a margin of safety limits your potential short-term losses on paper, and when the market stabilizes again, there is some room for multiples expanding and some additional gain for an even better total return.

Risks

The first risk is regulation both by the states and by the federal government. The company’s regulated utility segment has a significant reliance on the decisions of politicians. They can limit price increases especially when it comes to the price of electricity. In addition, the company is also affected by federal regulation especially when it comes to its midstream business, and the federal government is not very accommodating when it comes to fossil fuels.

Moreover, there is the risk of fluctuating energy prices. While energy prices are climbing lately, this move may be temporary due to the war in Ukraine, which limits the access of Russia to the world energy markets. Changes in the war or an agreement between Russia and Ukraine may send energy prices down. Countries securing energy sources may also slowly erode the prices of energy, that part of UGI relies on.

Inflation is another risk and it corresponds with the regulatory challenge. Inflation causes higher prices for materials as well as labor. Inflation is extremely important in the regulated business as price increases require regulatory approval. During an inflationary environment, politicians may be reluctant to approve the increase and are likely to delay it for as long as they can.

Conclusions

UGI is a solid company with growth in both the top and the bottom line. This growth has been fueling long-term dividend growth, and UGI is a dividend aristocrat. The company has several growth prospects driven mostly by its diversification which gives it more options than its peers, and therefore the company is expected to keep growing.

While there are several risks to the investment thesis as well, mainly its reliance on fluctuating energy prices and the regulators, there is enough margin of safety. Therefore due to the current attractive valuation, I believe that UGI is a buy for the utility section of your portfolio.



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