Morningstar | We Expect Regular Dividend Increases for FirstEnergy Shareholders
In September 2018, the bankruptcy court approved a settlement agreement to provide payments, assurances, and asset transfers to FirstEnergy Solutions’ creditors that we estimate total about $2.7 billion.Although a bankruptcy judge on April 4, 2019, rejected the reorganization plan due in part to liabilities associated with closing nuclear and coal plants, we believe the plan will eventually be approved, allowing FirstEnergy to avoid years of litigation separating itself from its bankrupt merchant unit.The company can now focus on accelerating investments in its wide- and narrow-moat businesses that should result in strong earnings growth and put FirstEnergy in position to provide shareholders with annual dividend increases. In 2019, FirstEnergy raised its common dividend 5.6%, the first increase since it was cut by 35% in 2014. We forecast annual increases averaging over 4% over the next five years.We believe FirstEnergy’s transmission businesses demonstrate wide-moat characteristics due to the favorable federal regulatory framework providing consistent returns above the cost of capital. These transmission investments, estimated to contribute about 34% of earnings by 2023, provide an almost guaranteed economic benefit to shareholders.FirstEnergy is also accelerating its investment in its utilities with narrow-moat characteristics in states with constructive regulatory frameworks that are likely to produce consistent realized returns above their cost of capital. Together, businesses with wide- and narrow-moat characteristics represent about 85% of earnings following the separation from bankrupt FES.We are seeing improvement in New Jersey regulation that should eventually benefit no-moat Jersey Central Power & Light and allow it to earn closer to its allowed return. We believe solid earnings growth and a growing dividend will be the catalyst for the market valuing FirstEnergy shares more in line with its regulated utility peers with economic moats.FirstEnergy is a public utility holding company. The company and its subsidiaries are principally involved in the transmission, distribution and generation of electricity. The company's reportable operating segments are comprised of: Regulated Distribution, which distributes electricity through the company's utility operating companies and also controls regulated electric generation capacity located primarily in West Virginia, Virginia and New Jersey; and Regulated Transmission, which provides transmission infrastructure owned and operated by the transmission companies and certain of the company's utilities to transmit electricity from generation sources to distribution facilities.
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