Morningstar | PSEG Set to Carry Earnings and Dividend Growth Into 2019
We are reaffirming our $47 per share fair value estimate for Public Service Enterprise Group after the company announced earning $3.12 per share on an operating basis for the full-year 2018, up from $2.93 in 2017. This is in line with our expectations and management guidance. We are reaffirming our narrow moat and stable moat trend ratings.As we expected, PSEG’s distribution utility and its power generation segment continue moving in opposite directions. The utility’s operating earnings were up 10.5% for the full year, while the power generation segment earnings were mostly flat after adjusting for the one-time tax cut benefit.
We expect these divergent earnings paths to continue for at least several more years, lifting the utility's earnings to nearly three fourths of consolidated earnings. We continue to assume PSEG invests an average $3 billion annually during the next three years, in line with management's $11 billion-$16 billion five-year plan. If regulatory approvals go smoothly, the utility's earnings could hit the top end of management's 7%-9% annual growth target. PSEG Power likely will remain a drag. We expect 5% consolidated earnings growth.
The utility recently asked regulators to rule on its $3.6 billion, six-year investment plan as part of the state’s Clean Energy Future legislation. We expect rulings next year. We include $1 billion of CEF investments in our 2019-22 forecast. If regulators approve more investment, it could have a slight positive impact on our fair value estimate.
PSEG recently raised its dividend 4% to $1.88 annualized, its 15th increase in the last 16 years. With earnings growing faster than the dividend, PSEG's payout ratio is set to fall below 60% based on 2019 earnings. We think this leaves room for a step-up in dividend growth next year if the utility meets our growth expectations.
Public Service Enterprise Group, through its subsidiaries, is engaged in the energy industry. The company conducts its business through two subsidiaries, Public Service Electric and Gas Company (PSE&G) and PSEG Power LLC (PSEG Power). PSE&G is a public utility, which is engaged in the transmission of electricity and distribution of electricity and natural gas in certain areas of New Jersey; and PSEG Power is a multi-regional energy supply company that integrates the operations of its merchant nuclear and fossil generating assets with its power marketing businesses and fuel supply functions through energy sales in energy markets primarily in the Northeast and Mid-Atlantic United States.
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