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PPL spun off to a new Talen Energy. Shall I keep it or sell it?

PPL changesIf 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.

You may be interested in:
Talen Energy Corp. established as PPL Corp. energy generation spinoff by Kurt Bresswein
Talen Energy
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.

Grace GronerI 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.

You may be interested in:
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
 
 





16 responses to “PPL spun off to a new Talen Energy. Shall I keep it or sell it?”

  1. DivHut says:

    Happy to have come across this post. I just posted on my blog my May considerations and PPL is one of the names. Not sure why it isn’t more popular among our DGI peers. For spin offs I just hold them all whether they pay a dividend or not. It can be tough seeing cash sit there and not produce any monthly income but you never know how those spin offs will behave over the long haul.

    • Martin says:

      Yes, PPL is a good DGI stock. TLN is no longer a publicly traded company and I sold before they announced it. But still holding PPL and plan on doing so for the next 20 to 25 years.

  2. Ron says:

    Now that Talen (TLN) has bought back all shares and became a privately held co., how do we calculate out cost basis for the stock we soled to them It looks like Wells Fargo only calculated the basis back to 2011, when IRS made them do the work, and report the basis to them. However, because of the # of shares I received in the Spinoff, I must calculate further back than that. It looks like Wells Fargo the shares that bought at .125% (by original purchase date of PPL shares. since that was all dividends in my case, it looks like I must work backwards to find enough fractional share to make 12.6 shares (Wells Fargo calculated 2.4). How does the split in 2004 of PPL stock factor into this,

    • Martin says:

      PPL stock has nothing to do with TLN, so you can ignore it. The broker should tell you what the original spin off price was. Mine was $15.18 per share if I remember it correctly. I sold TLN in 2016 and do not remember it anymore.

  3. Marsha Eichner says:

    I don’t know what the tax complication would be if I sold all my TLN that I received as a spinoff from PPL. My accountant, although unsure if she is correct, says because it didn’t cost me anything, selling any of it would all be a capital gain. Is this true? Would it be the same if I rolled it over into PPL stock?

    • Martin says:

      No, it will not be a capital gain since you held it long enough to treat the trade as a long term investment, and thus it will be taxed the same way as qualified dividends based on your tax bracket (15% to 20%). If you are in the 10% to 15% tax bracket then you will pay no taxes on TLN at all. But first you need to determine whether you had gain or loss on the trade, see my previous comment.

  4. Marian Luckenbill says:

    I was in a financial bind and needed money to pay my real estate taxes. When I consulted my Financial Advisor about selling some PPL stock to cover this she brought the FREE Talen stock to my attention. Turned out the Talen stock sale was exactly what I needed. So I sold it. I call it a blessing from Heaven since I had “inherited” the PPL stock (from which Talen came) from my late husband.

    • Martin says:

      If you sold TLN after spinoff you probably made some nice money as now TLN is down. And yes, it was literally free money you could sell and yet keep PPL. Nice job.
      And thanks for stopping by.

      • Marsha Eichner says:

        I don’t know what to do with my TLN. I got paperwork stating they plan to cash out the people who received TLN at a low $14 per share. My accountant, unless she doesn’t know what she is talking about, says whatever I get and sell will ALL be a capital gain. I could roll the TLN over to PPL, but since I need $$ I was thinking about selling all of it. I received mine as a spinoff of my PPL stock. Didn’t cost me a cent….BUT what about when I sell it? Please advise.

        • Martin says:

          Hi, I am not a tax adviser and you really need to consult it with your CPA, however, your selling will be treated as any other sell of any other stock. First, you will need to obtain your cost basis from your broker. My cost basis was $15.56 (per the broker) so although I paid nothing, that amount still will be used towards the transaction and tax purposes. So if they will be buying you out at $14 a share, you will probably realize a loss on the stock. How the loss (or potential gain) will be treated then depends on how long you held the stock. If you held since the spinoff, it will already be categorized as a long term investment, thus, if you had any gain, it would be taxed as a qualified dividend (based on your tax bracket). If you realize a loss, you will be able to offset your other long term gains with it. So, if your cost basis is higher than $14 a share, most likely you do not have to worry about the transaction and you can cash it out. But again, consult this with your CPA.

  5. Chris says:

    I was researching the TLN spinoff to consider whether I should sell it before the tax year is over and came across this article. I felt compelled to post something since the author went through the same thought process I did and there seemed to be some confusion about the purchase price.

    The purchase price is $0 since it was spun off based on how many shares you had. It is .1249 shares for every PPL share that you owned. The only reason your brokerage may show a basis (purchase price) is for tax purposes. Instead of keeping your initial PPL purchase price the same after the spinoff, they are allocating some to TLN so when you sell TLN it’s not all 100% capital gains. I don’t know the formula or method that each brokerage uses, but it may differ. Your tax software or accountant should be able to choose what’s best for you.

    Although TLN has dipped pretty drastically since the spinoff I feel the selling is overdone on a PE and P/S valuation benchmark and because some of the selling may be people locking in the loss before 12/31 on what is probably the smallest holding in their portfolio. Based on that I’m holding or may even add to it here.

  6. Brian says:

    How did you get away with paying $16.31. I had a lot more through Schwab and mine was bought for $19.17. Before I blast Schwab in public can you verify?

    • Martin says:

      I contacted TD Ameritrade what my price was and that’s what they told me. Also their Tax & Gain Keeper shows that. So I hope it is the price. I just checked it and looks like I ended up paying even less than that, see attached picture.

  7. Tracey says:

    I’ve reviewed information and I’m going to keep it at this time. I’ve done well on other splits that I kept, so not worried about taking a risk on this one.

  8. Martin says:

    Me and my dog Joannie were interested in knowing what you guys think about PPL and Talen Energy (TLN), but no one knows. Either nobody reads this, nobody owns PPL or just nobody wants to comment. Poor Joannie, she will never find out what to do. Sell the stock or keep it.

    Well, I expected Talen to fall when dividend investors dump it since it will not pay dividends, but surprisingly the stock was growing amid a falling market.

    Thus my dog says, keep the stock. You?

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