Has PPL Corporation (PPL) Become the Perfect Stock?

PPL serves customers across a wide geography, but with substantial service in Pennsylvania, the utility had to deal with big outages due to Hurricane Sandy. About half a million customers were affected, but the company didn’t even mention the incident in its most recent quarterly report, making it clear that PPL doesn’t see the episode as having a substantial financial impact.

One concern with PPL is that it has had to issue new debt in order to finance dividend payouts. Despite generating substantial cash from operations and having an attractive earnings payout ratio, PPL’s massive capital expenditures in 2012 led to negative free cash flow for the year. With an already high debt-to-equity ratio, PPL needs to stay aware of the ongoing threat to its balance sheet. Nevertheless, that didn’t stop PPL from boosting its dividend last week by about 2%.

Looking forward, PPL is hoping to get growth from smart-grid technology. Increasingly, smart grid plays are drawing attention in the utility sector. Exelon Corporation (NYSE:EXC) is spending billions across its network of regional subsidiaries to install smart meters, modernize substations, and provide for variable pricing to customers who can take advantage of peak and off-peak usage trends. Meanwhile, Duke Energy Corp (NYSE:DUK) has signed on with a team of smart-grid players to get the benefits of the technology. For PPL’s part, it’s working with General Electric Copany (NYSE:GE) to upgrade its Pocono-region substations to shorten outage durations and prevent disruptions like the one that Hurricane Sandy caused.

For PPL to improve, it needs to follow through on its optimistic earnings forecast for 2013 and take steps to control its balance sheet better. If its smart-grid moves pay off and its U.K. business performs well, PPL could start moving back toward perfection in the years ahead.

The article Has PPL Become the Perfect Stock? originally appeared on Fool.com and is written by Dan Caplinger.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Exelon. The Motley Fool owns shares of General Electric.

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