UGI Corporation Announces Review of Strategic Alternatives

UGI may be considering spinning off its propane operation. Its propane business is about 40% of its earnings and this effort looks to reduce its earnings volatility and strengthen its balance sheet.

UGI Investor Update Slide Deck

Simply Safe Dividends issued a note on the news ($$). UGI may believe the market is not valuing the company completely and spinning off will unlock value for the company and shareholders. The downside of spinning off UGI’s propane business will result in a much higher earnings payout ratio. Right now UGI is at the top of their target range of 35% to 45%. Spinning off the propane business would result in a 70% or higher earnings payout ratio.

Simply Safe Dividends points out 70% is not unreasonable for most regulated utilities but wonders if UGI’s management will be comfortable with the change.