UGI Corp. (UGI): This 5.4% Yielding Aristocrat Is A 46% Discounted Buffett-Style Fat Pitch

This article was published at iREIT on Alpha on May 26, 2023 and was coproduced with Dividend Sensei.

The market is driving many investors crazy right now. How is the S&P 500 Index (SP500) within 11% of its all-time highs when we face a perfect storm of economic risks including:

• Congress is considering cutting spending by $500 billion in 2024

• The Fed refuses to cut rates even if we go into recession

• The Fed shrinking the money supply at the fastest rate since 1930

• Treasury is preparing to suck $1.5 trillion out of the economy by the end of the year with bond sales

• Student Debt payments restart in October, sucking another $129 billion out of the economy

• The debt ceiling negotiations are going nowhere, with a possible debt default just a week away

We potentially face a 1.5% to 4% GDP recession, 3X to 8X worse than economists recently expected.

Yes, in a worst-case scenario, we could be headed for another Great Recession…and that assumes we don’t default on our debt.

The answer is an AI-tech bubble in stocks like NVIDIA and Meta. This year, the nine largest US stocks generated 100% of the market’s gains.

But do you know what that means? It means the S&P 491 is down on the year, and some of the world’s best companies are down a lot more.

Let me show you why UGI Corp (NYSE:UGI), a 5.4% yielding dividend aristocrat, is a Buffett-style “fat pitch” table-pounding ultra-value buy.

In fact, it’s trading at the exact same P/E as the Pandemic lows and the Great Recession lows. The last time UGI was this undervalued, it went up 1400% in the next 15 years.

And today, it offers the chance to beat the S&P by 200% over the next six years, tripling your money while you lock in one of the safest 5.4% yields on Wall Street.

One Of The Best Values In High-Yield Aristocrats You’ve Never Heard Of

UGI has fallen off a cliff and is in its worst bear market since 1988.

• 51% bear market

• down 33% YTD.

What explains such a dramatic decline?

Click to enlarge

(Source: FAST Graphs, FactSet.)

Cash flow collapsed in 2022, though earnings came in at the 2nd highest level in history.

“The impact of headwinds faced at AmeriGas and in the European energy marketing operations stemmed from the geo-political situation and extreme variation in natural gas and electricity prices in Europe.”

– 2022 Annual report.

The war in Ukraine severely impacted UGI’s cash flows, sending EU energy prices soaring to record-high levels.

But that temporary shock is behind us, and management is confident that brighter times lie ahead.

In fact, management reiterated its long-term guidance for 6% to 10% EPS growth and 4% dividend growth on May 23rd at the AGA Financial forum.

Why UGI Is A High-Yield Aristocrat You Can Trust

UGI is one of the best utilities you’ve never heard of. It was founded in 1883 in King of Prussia, Pennsylvania, and has never missed a dividend in 139 years since it began paying in 1884. That’s through:

• 29 recessions

• 7 depressions

• two world wars

• a flu pandemic that killed 5% of humanity

• seven killer pandemics

• inflation as high as 22%

• interest rates as high as 20%

• over 24 bear markets.

It’s been raising its dividends for 36 consecutive years through:

• five recessions

• two economic crises

• seven bear markets

• inflation as high as 9.1%

• interest rates as high as 10%.

UGI is built to last and will likely outlive us all.

UGI is a global natural gas and propane utility operating in 18 countries, with 10,000 employees and over 2.5 million customers.

It is the 2nd largest regulated gas utility in Pennsylvania and the 2nd largest in West Virginia, and that regulated utility is A- stable rated by Fitch.

“UGIU’s rating and Outlook are supported by the low-risk profile of its regulated and predominantly natural gas distribution operations, supportive regulation in Pennsylvania, and healthy customer growth.”

– Fitch

It owns a midstream business that transports the gas it serves to its customers and has 84% of its revenue from fee-based contracts. And it is also the largest propane seller in America and 17 countries in Europe.

It’s the #1 propane seller in France, Austria, Belgium, Denmark, Luxembourg, and Hungary.

Regulators have granted UGI a 10% rate base growth through 2026, which is the part of its business the company is focusing almost all its investments on.

UGI’s YTD results are OK, certainly not worthy of a 50% crash.

EPS YTD is flat compared to last year, and the regulated utility business, the A-rated part of the company, is now 36% of sales.

The company is investing $400 million YTD heavily into that regulated business and has $1.9 billion in liquidity remaining.

The company did cut guidance for the year, primarily due to reduced demand from conservation in Europe created by the war and supply shortage at AmeriGas Propane.

Management reduced guidance to $2.75, a 3% decline from previous levels.

The market’s reaction? A 33% YTD decline.

This is a major overreaction when this is a diversified company with solid management that has proven it can adapt and overcome any and all challenges for 140 years.

Management is working to cut expenses, boost margins by selling off non-core businesses in Europe and make its supply chain more resilient against future disruption.

The company refinanced $1.7 billion in debt in Q2, improving its credit facilities by $220 million and boosting liquidity by $700 million compared to the end of 2022.

UGI has de-risked by refinancing all maturing bonds in 2023, the recession year.

In 2024 it has $1 billion in debt maturing, but Fitch and the bond market aren’t worried because of its strong balance sheet.

• 3.1 debt/EBITDA vs. 5.5 safe for utilities

• 54% debt/capital vs. 60% safe

• a 53% payout ratio vs. 75% safe

• 4.8 interest coverage ratio vs. 3+ safe.

UGI is effectively BB+ rated by cash flow weighting of its other subsidiaries.

• UGI International BB+ stable

• UGI Energy Services BB stable

• AmeriGas BB- stable.

The parent company doesn’t pay for a credit rating, but BB+ is the weighted rating, implying a 14% long-term bankruptcy risk.

• Why UGI is a 13/13 blue-chip and not an Ultra SWAN

• 2.5% max risk cap rec for a technically speculative non-investment grade company.

Why is UGI growing dividends half as fast as earnings? So it can retain more post-dividend earnings to invest in its regulated business and diversify away from its struggling propane business.

UGI pays $315 million in dividends and this year is expected to retain $277 million in earnings after dividends.

Analysts expect steadily rising growth spending rising from $1.2 billion in 2023 to $1.4 billion in 2026.

That’s for increased spending to grow the rate base by 10% annually and diversify into renewable energy, taking advantage of tax credits from the inflation reduction act.

Through 2026 the company expects to require $1.4 billion in new debt while spending $5.1 billion to maintain, improve and grow its asset base.

It plans to target a 40% payout ratio, one of the lowest in the industry, while maintaining debt/EBITDA of 3.3X, also one of the lowest in the industry.

This is so UGI has plenty of financial flexibility to diversify its business away from riskier propane and towards natural gas.

Part of that plan is focused on investing $1.1 billion (about 20%) of its spending on renewable energy, specifically renewable natural gas.

That’s the methane coming off landfills, which is capable of powering 3 million US homes.

UGI’s RNG projects are in California, Idaho, South Dakota, West Virginia, Ohio, Pennsylvania, New York, and Scotland.

UGI’s renewable investments are earning double-digit returns on investment, just like its regulated utility investments.

UGI is also looking into bio propane and renewable dimethyl ether, which is used in petrochemicals and hydrogen.

• a $3 trillion global industry by 2030, according to Cummins.

UGI is also working on renewable jet fuel, which is going to be the only way for low-carbon air travel unless we can perfect room-temperature superconductors.

• Which would allow EV planes to become a reality.

In other words, collapsing fundamentals or growth prospects do not support UGI’s 50% crash, including a 33% YTD decline. Nor is it justified by rising dividend risk.

• 99% dividend safety

• 1.05% severe recession dividend cut risk

• 0.5% average recession cut risk.

In other words, even if the U.S. were to default on its debt and be plunged into another Pandemic or Great Recession economic hell, UGI would be almost certain to keep paying and raising its dividend just as it has for the last 139 and 36 years, respectively.

Solid Long-Term Growth Prospects

After a rough 2022, UGI is expected to recover in 2023 and beyond, growing steadily through 2026.

What about after 2026? Is growth going to fall off a cliff due to falling propane demand around the world?

The median consensus from all five analysts covering UGI is 6% long-term growth beyond the current guidance period of 2026.

The low end of current management growth guidance is 6% to 10%.

Over the last 20 years, UGI has grown as expected 92% of the time and misses 8% of the time, with the average miss being 10%.

In other words, a conservative estimate of future growth is 5.4%.

Long-Term Total Return Consensus

Click to enlarge

(Sources: DK Research Terminal, FactSet, Morningstar.)

Analysts expect 11.4% long-term returns from UGI, more than the S&P and dividend aristocrats.

Total Returns Since 1988

UGI has been delivering 11.4% annual returns (just as analysts expect in the future) since 1988. $1 invested in 1988 is worth $46 today, or $18 adjusted for inflation.

UGI’s average rolling returns have consistently been beating the S&P by 3% to 6% annually across every time frame, from 1 year to 15 years.

But I’m recommending UGI today because its valuation is literally at severe recession lows.

UGI Is The Same Valuation As The Pandemic And Great Recession Lows

Today you can buy UGI at the same valuation as you could have in the darkest days of the Great Recession and Pandemic.

That means a potential 100% return in the next three years.

What kind of medium-term returns can buying a 92% quality blue-chip aristocrat during the worst bear market since 1988 get you?

Best Bear Market Recovery Rallies Since 1988

Click to enlarge

The last time UGI was this undervalued, it delivered 15X returns over the next 15 years.

• The best 15-year return for the S&P is 447%.

In other words, UGI has the potential to triple the S&P’s returns over the next 15 years.

2029 Consensus Total Return Potential

Through 2029 UGI has the potential to almost triple, delivering Buffett-like 18% annual returns.

• 15% to 21% CAGR consensus return potential range.

A Wonderful Company At A Mind-Blowing Great Price

For 20 years, outside of bear markets and bubbles, millions of income investors have paid 15 to 18X earnings for UGI.

• 91% statistical probability this is range includes intrinsic value

Click to enlarge

UGI is historically worth about 17X earnings and today trades at 9.1X and just 8X cash-adjusted earnings.

• priced for -1% long-term growth

• actually growing 6%

• and 6% to 10% expected through 2026.

Click to enlarge

UGI is a potential Ultra Value Buffett-style “fat pitch” buy for anyone comfortable with its risk profile.

Risk Profile: Why UGI Isn’t Right For Everyone

There are no risk-free companies, and no company is right for everyone. You have to be comfortable with the fundamental risk profile.

UGI’s Risk Profile Includes

• industry/economic cyclicality (gas and propane demand are more cyclical than other types of utilities)

• industry disruption risk (from shifting consumer and regulatory tastes)

• political/regulatory risk (rate cases and potential shift to electric heating)

• litigation risk (modest for new midstream projects)

• M&A execution risk (lots of tuck-in acquisitions over the years)

• talent retention risk in the tightest job market in 54 years

• supply chain disruption risk (causing havoc globally right now, making completing new growth projects challenging)

• currency risk (36% of sales overseas)

• commodity price risk

• refinancing risk in a rising rate environment.

How do we quantify, monitor, and track such a complex risk profile? By doing what big institutions do.

Long-Term Risk Management Analysis: How Large Institutions Measure Total Risk Management

DK uses S&P Global’s global long-term risk-management ratings for our risk rating.

• S&P has spent over 20 years perfecting their risk model

• which is based on over 30 major risk categories, over 130 subcategories, and 1,000 individual metrics

• 50% of metrics are industry specific

• this risk rating has been included in every credit rating for decades.

The DK risk rating is based on the global percentile of a company’s risk management compared to 8,000 S&P-rated companies covering 90% of the world’s market cap.

UGI scores 54th Percentile On Global Long-Term Risk Management

S&P’s risk management scores factor in things like:

• supply chain management

• crisis management

• cyber-security

• privacy protection

• efficiency

• R&D efficiency

• innovation management

• labor relations

• talent retention

• worker training/skills improvement

• occupational health & safety

• customer relationship management

• business ethics

• climate strategy adaptation

• sustainable agricultural practices

• corporate governance

• brand management

• interest rate risk management.

UGI Long-Term Risk Management Is The 313th Best In The Master List (37th Percentile In The Master List)

Click to enlarge

(Source: DK Research Terminal.)

UGI’s risk-management consensus is in the bottom 37% of the world’s best blue-chips, and is similar to:

• NextEra Energy (NEE): Super SWAN dividend aristocrat utility

• Dover (DOV): Ultra SWAN dividend king

• Automatic Data Processing (ADP): Ultra SWAN dividend aristocrat

• PPG Industries (PPG): Ultra SWAN dividend aristocrat

• Polaris (PII): Super SWAN dividend champion.

The bottom line is that all companies have risks, and UGI is average at managing theirs, according to S&P.

How We Monitor UGI’s Risk Profile

• 5 analysts

• one credit rating agency

• 6 experts who collectively know this business better than anyone other than management

“When the facts change, I change my mind. What do you do, sir?”

– John Maynard Keynes.

There are no sacred cows at iREIT or Dividend Kings. Wherever the fundamentals lead, we always follow. That’s the essence of disciplined financial science, the math behind retiring rich and staying rich in retirement.

Bottom Line: This 5.4% Yielding Dividend Aristocrat Is 50% Undervalued

Let me be clear: I’m NOT calling the bottom in UGI (I’m not a market-timer).

Even Ultra SWANs and aristocrats can fall hard and fast in a bear market.

Fundamentals are all that determine safety and quality, and my recommendations.

• over 30+ years, 97% of stock returns are a function of pure fundamentals, not luck

• in the short term; luck is 25X as powerful as fundamentals

• in the long term, fundamentals are 33X as powerful as luck.

While I can’t predict the market in the short term, here’s what I can tell you about UGI.

• one of the best high-yield aristocrats you’ve never heard of

• very safe 5.4% yield (1.05% risk of a dividend cut), growing 4% through 2026 and 6% long-term

• 11% to 12% long-term return potential vs. 10.2% S&P

• historically 46% undervalued

• 9.1X earnings vs. 15 to 18X historical

• 8.0X cash-adjusted earnings = -1% growth priced in

• 185% consensus return potential over the next six years, 18% annually, 3X more than the S&P 500

• 100% better risk-adjusted expected returns than the S&P 500 over the next five years

• 3X the income of the S&P over the next five years.

It’s always and forever a market of stocks, not a stock market. Today the market is 16% overvalued, but UGI is one of the most undervalued blue-chip bargains on Wall Street.

It’s a steadily growing 5.4% yielding aristocrat utility that could triple in six years.

The last time it was this undervalued, it soared 1400% in the next 15 years.

How would you like to buy a wonderful company at a wonderful price, locking in a wonderful, very safe yield, and likely run circles around the S&P and Nasdaq in the coming years?

That’s what UGI Corporation offers today.