If you own shares of PPL Corporation, you are most likely a new owner of a brand new company Talen Energy. I bought 66 shares of PPL a few years ago, I think it was in 2013, and since then my holdings grew up 12% plus I enjoyed a nice dividend at around 4% annually.
PPL has been increasing the dividend for 15 consecutive years. Its 3 year average dividend growth is at 2.1%. The last year dividend growth was at 9.85%, which is impressive. And PPL’s current yield of 4.70% is also attractive.
In the past, the dividend yield and growth fluctuated significantly. In 2013, the dividend growth was negative (-7.69%), in 2012 it was positive (5.93%), etc. I think in the near future, PPL will enjoy a positive dividend growth and it will be a great and shiny dividend growth company. Why?
I believe, it is because of a recent spin off.
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Talen Energy Corp. established as PPL Corp. energy generation spinoff by Kurt Bresswein
What Should PPL Corp. Shareholders Do With A 65% Stake In Talen Energy? by Chronic Bull at Seeking Alpha
In 2013 PPL announced it will spin off a portion of its business into a new company. And the new company is Talen Energy (TLN). So why PPL did it and why it seems that it will help PPL to have more consistent revenues and thus dividend growth?
PPL made money, originally, in two major segments – power (energy) generation (unregulated segment), and energy delivery (regulated segment). PPL owned several power plants (coal/gas/ oil fired plants as well as nuclear plants) around the country such as in Kentucky, Pennsylvania, Montana, as well as in the United Kingdom. In many of the States, and in the UK, it was also involved in energy (electricity, and in some locations natural gas) delivery to the end users.
And here was the problem. The unregulated segment of energy generation was very volatile and dependent on natural gas, oil, and coal prices. The volatility was responsible for unstable revenues and as I believe, dividend growth. The company was able to overcome bad years and keep the dividends growing, but the history of the dividend growth shows the picture of the struggle quite clearly.
PPL still increased the dividend, but due to a huge slump in 2014, the growth was very small. And thanks to low oil prices in 2014 – 2015, it will most likely be small in 2015 as well.
From this perspective it looks like the spin off was a good move. By doing so, PPL got rid of all its unstable energy generation segment and a new company, Talen Energy (TLN), is now completely involved in energy generation while PPL in energy delivery.
Every holder of a PPL stock received 0.125 shares of TLN. My 66 shares of PPL earned me 8 new shares of TLN at $16.3112 initial purchase cost (I actually didn’t pay for it, but this was the spin off initial price reported to my broker by the new company). At a current price of $19.30 a share I am immediately gaining 18.32% profit.
It is nice, but as a dividend investor, I look at it from the dividend perspective. And that perspective shows that Talen is not paying a dividend and most likely will not pay a dividend. From the CEO speech at the initial conference call it is clear that this will be a growth company focused on M&A (mergers and acquisitions) rather than on dividends.
And here comes my dilemma. Should I sell the new stock and invest all proceeds back to PPL or keep the stock and let it go?
Reason to sell
The reason to sell TLN is simple. No dividend, no holdings. Why holding a stock which may (and also may not) sometimes in the future make me money. The power generation sector is so volatile that it has big up swings as well as huge down periods, just look at oil price chart in the last 20 years and you will see what I am talking about. What if I need the cash and the stock will be down? A never ending problem with 4% withdrawal rule, right?
Reason to hold
The reason to sell TLN is more pragmatic, while the reason to keep it is more from the land of dreams. Once I read a story about an old woman who died a few years ago, but lived long enough to remember both world wars, but most importantly, she died very rich.
When she was born sometimes in 1902, her father bought her 1 share of AT&T company (at that time the company’s name was Bell Telephone Company). The old lady held the stock until her death, but over the years, she not only held the original stock, but many more shares of all the spun off companies (such as AT&T, Lucent Technologies, NCR, and others). She also ended up holding many shares of AT&T company (as the company split stocks several times over the years).
And of course, she was receiving and reinvesting fat and growing dividends from many of those companies she held.
I do not remember details and all names of those companies, or how much she ended up having in her portfolio. I couldn’t find her story on the Internet anymore. But there was a similar story about another woman named Grace Groner who purchased 3 stocks of Abbott Laboratories in 1935. In 2010, at the time of her death, all her holdings grew into $7 million dollars thru dividend reinvestment, stock splits, and spin offs.
A great example of compounding. Yes, she was compounding for 75 years, and even though it looks like she never used the money, it clearly shows that over time and with the right dividend growth stock your investment can grow substantially.
Both women kept all the spun off stocks and let them grow over the years. That’s was impresses me and makes me think to keep TLN. Although TLN can be a volatile company due to the nature of its business, it may grow, split, and spin more, and more, over time.
Getting the shares didn’t cost me a penny. I didn’t have to sell PPL or any other stock to buy TLN. I didn’t have to add more cash to my account to buy TLN. It was given to me. I still hold 66 shares of PPL, enjoy nice dividend and the price of the stock is still 12% up amid a small turbulence after the spinoff and current tornado in the stock market.
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The Problem With Grace Groner (And Stories Like Her’s) by Nelson Smith at Financial Uproar
I can easily pretend that I haven’t received any new stock. But there is still that little doubt back in my head that now I have additional $154 which I can add to my savings and later (once I save more money using my commission free ETF strategy) buy a dividend growth stock. It could either be PPL or COP.
Keeping the stock is very appealing to me, but the pragmatic voice is strong too.
This is why I am asking you, my readers, what would you do in this situation? Hold TLN or sell it?
Let me know, what you think!
Image credit: WNEP