Photo by Joshua Mayo on Unsplash
 

If you are looking for a high-quality dividend growth company, you will be very interested in our next stock. Today we will be discussing UGI Corporation stock. 

UGI Corporation (UGI) is one company I own and have been buying recently, and it continues to look like an excellent price to pick up more shares. The stock is trading at $26.50 per share as of this writing. In this article, we will determine if the company is undervalued and deserving of our hard earn money. 

Based on the Fastgraphs, the stock is estimated to return over 39.1% per year for the next three years at the current price.

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Source: Fast Graphs

Here we have a technical chart of UGI. We can see that it’s near a long-term trendline and down 5 bars on the monthly time frame.

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Source: TradingView
 

Overview of UGI

UGI Corporation is a multifaceted energy company with operations across the United States and global markets. The company distributes, stores, transports, and markets energy products and related services through its four segments – AmeriGas Propane, UGI International, Midstream & Marketing, and UGI Utilities. AmeriGas Propane serves approximately 1.3 million customers with propane through 1,400 distribution locations. UGI International distributes liquefied petroleum gases (LPG). Additionally, UGI Utilities engages in retail sales of natural gas, liquid fuels, and electricity to around 12,400 customers at 42,000 locations, distributing natural gas to approximately 677,000 customers in Pennsylvania and supplying electricity to about 62,600 customers in northeastern Pennsylvania. 

UGI stock is down 55.3% since its all-time high in December 2018. The main driver of the stock price decrease has nothing to do with the company itself, as earnings have been consistent. Instead, it is due to the overall stock being overvalued when interest rates were low.

As of this writing, the current stock price of $26.50 is near the low end of the 52-week range, between $25.58 and $43.75 per share. Thus, UGI looks like a stock in the right place to acquire shares. 
 

UGI Stock Dividend History, Growth, and Yield

We will look at UGI’s dividend history, growth, and yield. We will then determine if it’s still a good buy at current prices.

UGI is considered a Dividend Champion, a company that has increased its dividend for over 25 years. Additionally, UGI is one of the few stocks paying a dividend for hundred years.

In this case, UGI stock has increased its dividend for 36 consecutive years. UGI’s most recent dividend increase was 4.2%, announced in May 2023. Investors should expect another increase in May 2024.
 

Dividend Growth

Additionally, according to Portfolio Insight, UGI has a five-year dividend growth rate of about 7.6%. The 10-year dividend growth rate is a little lower at ~7.2%. However, the dividend growth rate has been decreasing in recent years, something to keep an eye on.

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Source: Portfolio Insight

Something note is that UGI stock continued to pay its dividend during the most challenging period in the last 100 years. Many businesses and industries cut or suspended dividend payments during the COVID-19 pandemic. However, unlike many other stocks, UGI continued to pay out its dividend and increased them. That is very noteworthy. This fact alone leads me to believe in the strength of the company and the fact that management is focused and committed to the dividend policy.
 

Dividend Yield

The company has an excellent dividend yield of approximately 5.7%, higher than the dividend yield of the S&P 500 Index and more than the 5-year average of about 3.3%. This dividend yield is a solid initial yield for dividend growth-driven investors. And it is an excellent stock for income-driven investors who want a 4.5% yield or higher.

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Source: Portfolio Insight

UGI’s current dividend yield is higher than its 5-year average dividend yield of ~3.3%. I prefer looking at this metric because it gives me a good idea if a company I am researching is undervalued or overvalued based on the current and 5-year average yield. Stock price and dividend yield are inversely related. The dividend yield decreases if the stock price increases, and vice versa.
 

Dividend Safety

Is the current dividend safe? This metric is critical to look at as a dividend growth investor. Undervalued dividend stocks sometimes present a “value trap,” and the stock price can continue to decline.

We must look at two critical metrics to determine if the dividend payments are safe yearly. The first one is adjusted operating earnings (EPS), and then we must investigate free cash flow (FCF) or operating cash flow (OCF) per share.

Analysts predict that UGI stock will have earnings per share of about $2.82 for the fiscal year (FY) 2023. Analysts are 67% accurate when forecasting UGI’s future EPS. Also, the company misses these estimates 33% of the time. In addition, the company is expected to pay out $1.47 per share in dividends for the entire year. These numbers give a payout ratio of approximately 52.2% based on EPS, a conservative and outstanding value, leaving the company with much room to continue to grow its dividend.

I want a payout ratio of under 60%, so the UGI dividend is covered with a dividend yield of ~5.7% with high future growth. At this point, it will allow the company to continue to grow its dividend at a mid-single-digit rate without sacrificing dividend safety. In addition, UGI has a dividend payout ratio of 27.3% on an OFC basis. Thus, the dividend is well covered in both EPS and OFC.
 

UGI Stock Revenue and Earnings Growth / Balance Sheet Strength

We will now look at how well UGI performed and grew its EPS and revenue throughout the years. When valuing a company, these two metrics are at the top of my list to study. Without revenue growth, a company can’t have sustainable EPS growth and continue paying a growing dividend.

UGI stock’s revenue has been growing reasonably at a compound annual growth rate (CAGR) of about 3.9% for the past ten years, according to Portfolio Insight. Net income improved, with a CAGR of ~16.9% over the same ten-year period. However, EPS has grown 9.0% annually for the past ten years and at a CAGR of 4.8% over the past five years.

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Source: Portfolio Insight

Since revenue, net income, and EPS grew well over the years; we will determine if this stock is attractive based on its valuation and dividend yield. We will talk about the company’s valuation later in this article. In the meantime, analysts predict that the company will grow EPS at a 5.6% rate over the next five years. 

Last year’s EPS decreased from $2.96 per share in FY2021 to $2.90 per share for FY2022, a decrease of 2%. Additionally, analysts expect UGI stock to make an EPS of $2.82 per share for the fiscal year 2023, which would be a ~3% decrease compared to FY2022. This is something I dislike seeing, future earnings declining. However, in the following years, earnings are expected to be 12% higher in 2024 and another 8% increase in 2025.
 

Balance Sheet

The company has a solid balance sheet. The company has an excellent debt-to-equity ratio of 1.4. Thus, the company has a stable balance sheet to overcome significant economic downturns like the COVID-19 pandemic last two years, adding to the dividend safety. Moreover, the dividend quality grade is a ‘B+.’ It could be higher if earning growth improves.
 

UGI Stock’s Risk and Competitive Advantages

Like any company operating in the energy sector, UGI Corporation is exposed to various investment risks that investors should consider. One of the primary risks is the volatility of energy prices. Fluctuations in oil, gas, and other energy commodity prices can significantly impact UGI’s revenues and profitability. Changes in global demand and supply dynamics, geopolitical events, and macroeconomic conditions can lead to price volatility.

Another notable risk is regulatory and political uncertainty. The energy industry is subject to stringent regulations, which can impact UGI’s operations and profitability. Government policies, environmental regulations, and taxation changes can create uncertainties for the company’s business outlook and financial performance.

However, UGI Corporation enjoys several competitive advantages that position it favorably in the energy market. One of its key strengths is its diversified business model, operating across multiple segments, including propane distribution, natural gas, electricity supply, and international operations. This diversification allows the company to mitigate risks associated with fluctuations in specific markets or energy products.

Another competitive advantage lies in UGI’s extensive distribution network. With thousands of distribution locations and miles of gas mains and electric lines, the company has a broad customer reach, serving both residential and commercial consumers. This wide coverage enhances customer retention and creates barriers for new competitors trying to enter the markets where UGI operates.
 

Valuation for UGI Corp.

One of the valuation metrics that I like to look for is the dividend yield compared to the past few years history. I also want to look for a lower price-to-earnings (P/E) ratio based on the past 5-year or 10-year average. Lastly, I like to use the Dividend Discount Model (DDM). I use a DDM analysis because a business ultimately equals the sum of the future cash flow that the company can provide. 

Let’s first examine the P/E ratio. UGI has a P/E ratio of ~9.4X based on FY 2023 EPS of $2.82 per share. The P/E multiple is excellent compared to the past 5-year P/E average of 15.9X. If UGI were to vert back to a P/E of 15.9X, we would obtain a price of $44.84 per share.

Now let’s look at the dividend yield. As I mentioned, the dividend yield currently is 5.7%. There is good upside potential as UGI’s 5-year dividend yield average is ~3.2%. For example, if UGI were to return to its dividend yield 5-year average, the price target would be $45.94.

The last item I like to look at to determine a fair price is the DDM analysis. I factored in a 9% discount rate and a long-term dividend growth rate of 5%. I use a 9% discount rate because of the higher dividend yield. In addition, the projected dividend growth rate is conservative and lower than its past 5-year average. These assumptions give a fair price target of approximately $38.59 per share.

If we average the three fair price targets of $44.84, $45.94, and $38.59, we obtain a reasonable, fair price of $43.12 per share, giving UGI a possible upside of 62.7% from the current price of $26.50.
 

Final Thoughts on UGI Corporation (UGI) Stock

UGI is a high-quality company that should meet most investors’ requirements. The company has a market-beating 5.7% yield and a long-term dividend growth history. Past earnings growth has been excellent. But past performance does not mean it will be the same in the future. However, at the current price, the stock looks attractive. 

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