3/3/12
As the markets continue to march
higher, I am getting more and more convinced that we will see a blow off top,
resulting in a high on the S&P of 1400 before we see a 3-5% pullback. I continue to be bullish crude oil
until April crude falls below $104.50/barrel, meaning that you’ll see lower
consumer confidence, lower retail sales, higher unemployment and lower
corporate earnings. All that
spells lower stock prices despite being bullish for Dow components, Exxon Mobil
and Chevron. Additionally, tensions
in Iran are not going to retreat quickly and there are still major problems in
Europe. All this being said, I
think it’s time to move from overweight growth to underweight, and move from
underweight income to overweight.
That’s why this week I wanted to recommend
a stock paying a high dividend but also has good growth. Keeping with the theme from last week
about bottoming natural gas prices, I’m recommending a $16.5B company called PP&L Corporation (PPL). PPL is an energy and utility company
that delivers natural gas to over 5 million customers in the northeast and
northwest. They operate in 3
regulated segments; Kentucky, Pennsylvania and International. The supply segment of the company owns
and operates power plants to generate electricity using coal, uranium, natural
gas, oil and water resources.
Internationally, they distribute electricity to 7.7 million customers in
the United Kingdom. Management
just recently announced a small 3% increase in their dividend to boost it to 5%
or $1.44/share. With a payout
ratio of just 63% of net income, the company has plenty of room to continuously
increase the dividend.
PPL is trading for just 11x 2012
earnings with a PEG ratio of 2.64.
On February 10th, PPL reported better than expected earnings
where the stock rose almost 3%.
The company reported FY11 earnings of about $1.44B or $2.61/share (a 20%
increase YOY) citing solid performance in all business segments. Management expects 2012 earnings to be
between $2.15-$2.45/share. The
reason for the decline compared to 2011 earnings is due to a drop in operating
margins in their more regulated businesses, where they expect to get about 70%
of their revenues from, compared to 60% in 2011. Analysts currently have 7 buys and 10 holds, with an average
price target of $29.85.
From a technical perspective, PPL
looks very strong with good support.
Since December, PPL has built an inverted head-and-shoulders with both
shoulders bottoming at exactly $28.28 and the bottom of the head at
$27.29. On February 17, PPL broke
back through the 50-day moving average, closed below it immediately the next
day and has since rallied off it everytime it’s been challenged. Friday’s low turned out to be exactly
the 50-day moving average, where it then rallied to close down $0.11 at $28.46, a perfect low risk entry price
for the stock. On the downside,
you want to stop yourself out if PPL falls below the head, so use a stop loss
of $27 for about a 5% loss, a level it hasn’t been at since October 4 (which
just happens to be the 52 week low for stock market). Not only is that a big reason I like stopping yourself out
at that level, but also because it’s below the head, below the uptrend line
that comes into play at $27.54 and below the 50% Fibonacci retracement at $27.19. PPL is already up about 9.5% this year
excluding dividends, but I think it has more room to run, as I’m looking for a
rally to new highs at $32, with the next level of resistance coming into play
at $28.95 (the 78.6% Fibonacci number and the breakout level of the inverted
head-and-shoulders.
Full disclosure: I currently hold no positions in PPL but am planning on
initiating one on Monday.
Jeff Lewison
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