Public Service Enterprise Group Inc. (NYSE: PEG) with a target price of $69, raised from $55. We have a positive view of PEG’s growing network of transmission assets and pipeline construction projects. We also like its well-managed gas distribution segment and favorable regulatory environment.
We expect above-average growth in the company’s rate base from its growing infrastructure investments, as well as higher profitability in its nonregulated operations. The shares currently offer a solid dividend yield of about 3.6%.
Our positive view also reflects the company’s efficiently operated nuclear generation units, focus on balance sheet improvement and, prior to the coronavirus, expanding economic activity in its service area. We believe that the company’s core business strategy complements its well-balanced energy asset portfolio, and that its regulated electric and gas businesses are well positioned for moderate growth beyond 2021.
The beta on PEG shares is 0.56.
Investment in transmission assets added $0.04 per share to 3Q20 net income. The Electric margin improved by $0.01 per share.
PSEG Power posted non-GAAP operating earnings of $167 million, up from $145 million.
EARNINGS & GROWTH ANALYSIS
These estimates assume expansion of the company’s electric and gas transmission and distribution assets, as well as a continued favorable natural gas supply position and normal nuclear generating plant operations.
FINANCIAL STRENGTH & DIVIDEND
Moody’s rates the company’s debt as Baa1/stable and S&P rates it as BBB+/stable. Public Service remains focused on balance sheet improvement, growth in cash flow, and strong cost controls.
While total debt has increased as a result of the company’s infrastructure buildout program, the overall cost of financing has declined due to refinancing activity and lower interest rates.
Increasing shareholder value remains a priority for the company, which has paid dividends without interruption since 1907. The annualized dividend is currently $1.96 per share. Our dividend estimates are $1.96 for 2020 and $2.04 for 2021. We expect dividend increases of 3.5%-4.0% annually over the next 3-4 years.
MANAGEMENT & RISKS
Ralph Izzo was elected chairman and CEO of Public Service Enterprise Group in April 2007. He became the company’s president and chief operating officer and a member of the board in October 2006. He previously served as president and chief operating officer of PSE&G. In September 2015, Daniel J. Cregg, formerly VP of Finance, was named executive vice president and CFO. During his 25-year career with the company.
The company’s earnings could also come under pressure in the event of a downturn in the U.S. economy due to the pandemic.
It has three primary wholly owned subsidiaries: PSE&G (a regulated utility), nonregulated PSEG Power (nuclear, solar and wind-powered electric generating operations), and (PSEG Long Island (a regulated utility). The company operates a portfolio of 12,100 megawatts of installed generating capacity.
Other favorable factors are the company’s experienced management team, strong operating efficiencies, limited risk profile, solid cost controls, and generally positive relations with regulators.
On November 24 at midday, BUY-rated PEG traded at $59.76, up $1.34.