PPL Underperforms Its Industry in Six Months: How to Play the Stock?

PPL Corporation’s PPL shares have gained 2.7% in the last six months compared with the Zacks Utility-Electric Power industry’s rise of 11.9%. The company also underperformed the Zacks Utilities sector in the same time frame.

PPL reported positive earnings surprise in the last reporting quarter, but higher operating expenses are a concern. However, the company is benefiting from increased data center demand, particularly in Pennsylvania and Kentucky, as these facilities require substantial electricity.

Another operator in the same space, Xcel Energy XEL, is making a substantial investment to strengthen its infrastructure to provide reliable services to customers. The company missed earnings estimates in the last reporting quarter and its shares have gained 10.2% in the past six months.

Price Performance (Six months)

Should investors consider adding PPL to their portfolio based on the current softness in price movements? Let us delve deeper and find out the factors that can help investors decide whether it is a good entry point to add the PPL stock to their portfolios.

Core Tailwinds Strengthening PPL Corporation’s Outlook

PPL Corporation’s capital investment strategy is heavily focused on strengthening its generation, transmission and distribution infrastructure. These continuous upgrades have already improved system reliability, resulting in fewer customer outages. Looking ahead, the company intends to invest $20 billion from 2025 to 2028 to further enhance operations and ensure it continues delivering high-quality service to customers.

PPL Corporation utilizes a “self-healing grid” as part of its smart grid technology, enabling the system to automatically identify outages and reroute power to reduce customer disruptions. This advanced setup delivers real-time data, supporting proactive maintenance and boosting overall grid resilience and efficiency.

PPL is also experiencing load growth in its service regions, driven by data center demand. Nearly 20.5 gigawatts (“GW”), up from 14.4 GW in the second quarter, of potential data center demand are in the advanced stages, in Pennsylvania region representing a potential transmission capital investment of $1 billion, up from $0.4 million. In Kentucky region, data center requests have increased to 8.7GW from 5.7GW in the second quarter. The company has infrastructure in place to serve the rising demand in its service region and gain from the same.

More than 60% of PPL’s capital investment plan is subject to “contemporaneous recovery,” which reduces the impact of regulatory lag on earnings for investments. The recovery of capital expenditures quickly allows the company to fund long-term projects easily.

Headwinds for PPL

PPL’s Pennsylvania Regulated segment faces competition for transmission projects. It has to abide by certain rules of the Federal Energy Regulatory Commission to develop transmission projects and structure the cost for the same. The increasing competition in the transmission business, thus forcing the company to reduce costs to remain competitive.

PPL makes significant investments in infrastructure projects and those need to comply with environmental laws. Any delay or failure of completion of projects on time or within budget and increased unforeseen costs or risk of recovery of project costs could negatively impact its financials.

PPL’s Earnings Estimates Going Up

PPL expects its 2025 earnings estimate in the range of $1.78-$1.84 per share. The Zacks Consensus Estimate for PPL’s 2025 and 2026 earnings per share indicates a year over year increase of 7.1% and 8.29%, respectively.

Another utility, DTE Energy DTE, operating in the same space, is also making substantial investments like PPL to upgrade its infrastructure. The Zacks Consensus Estimate for DTE’s 2025 and 2026 earnings per share indicates a year-over-year increase of 5.9% and 7.1%, respectively.

PPL’s Capital Return Program

The company has been distributing dividends to its shareholders for a long time and plans to increase dividends annually in the range of 6-8% at least through 2028, subject to the board’s approval. The company’s current quarterly dividend rate is 27.25 cents, resulting in an annual dividend of $1.09 per share. The current dividend yield is 2.99%, which is better than the S&P 500 group’s yield of 1.54%.

PPL has raised dividends for its shareholders four times in the past five years. Check PPL’s dividend history here.

PPL Stock Returns Lower Than the Industry

Return on Equity (“ROE”) shows how effectively a company’s management is utilizing investors’ money to generate returns. ROE of PPL is a tad lower than its industry. The current ROE of the company is 9.08% compared with its industry’s 9.95%.

PPL Stock Trades at a Premium

PPL Corporation is currently valued at a premium compared with its industry on a forward 12-month P/E basis. The stock is trading at P/E F12M of 18.28X compared with its industry’s 15.24X.

Rounding Up

PPL is well-positioned to benefit from the rising demand for clean energy across its service areas. The company is making investments to expand its operations to meet rising demand. PPL’s ability to recover more than 60% of its capital expenditures in real time provides flexibility to efficiently fund long-term projects.

PPL is increasing shareholders' value by making regular dividend payments and its earnings estimates are also moving up.

Yet, PPL Corporation’s shares currently trade at a premium and its returns remain slightly below the industry average. So, the new investors should wait for a better entry point to add this Zacks Rank #3 (Hold) stock to their portfolio.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 

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This article originally published on Zacks Investment Research (zacks.com).

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