UGI

How does UGI's dividend yield compare to its cost of capital, and does it provide an attractive risk‑adjusted return for investors?

Created August 06, 2025 at 08:26 PM

Answer

Below is a step‑by‑step assessment of how UGI’s newly‑declared dividend relates to the company’s cost of capital and whether it is likely to deliver an attractive risk‑adjusted return for investors. Because the press release only tells us the dividend amount ($0.375 per share) and the payment dates, I will first outline the data you would need to calculate a precise dividend yield and cost‑of‑capital, then walk through a “typical‑range” example using publicly‑available market information for UGI (NYSE: UGI) as of the dividend‑announcement date (6 Aug 2025). Finally, I will interpret the results in the context of risk‑adjusted return.

1. What you need to compute the dividend yield

Input	How it is derived
Quarterly dividend per share	$0.375 (from the news)
Annualized dividend per share	$0.375 × 4 = $1.50
Current market price per share	Closing price of UGI on or near 6 Aug 2025 (e.g., $140‑$150)
Dividend yield	Annual dividend ÷ current price (expressed as %).

If the market price on 6 Aug 2025 was $145, the dividend yield would be:

[
\text{Yield}= \frac{1.50}{145}=1.03\%
]

2. What you need to estimate UGI’s cost of capital (WACC)

Component	Typical estimation method
Cost of equity	Capital‑Asset‑Pricing Model (CAPM):   Cost eq = Risk‑free rate + β × Equity‑risk premium.   Assumptions for a U.S. utility‑related firm (2025):   – Risk‑free (10‑yr Treasury) ≈ 4.3 %   – β (historical) ≈ 0.9–1.0   – Equity‑risk premium ≈ 5.5 %   → Cost eq ≈ 4.3 % + 0.95 × 5.5 % ≈ 9.5 %
Cost of debt	Yield on UGI’s senior unsecured bonds (or Baa‑rated corporate bond) after tax.   Assume pre‑tax cost ≈ 4.8 % and a 25 % marginal tax rate → after‑tax cost ≈ 3.6 %.
Capital structure	Debt‑to‑equity ratio for UGI (typical for a mid‑size energy distributor) ≈ 0.6 (i.e., 37 % debt, 63 % equity).
Weighted‑average cost of capital (WACC)	[

\text{WACC}=E/V \times \text{Cost eq} + D/V \times \text{Cost debt}
]
Using the numbers above:
  WACC ≈ 0.63 × 9.5 % + 0.37 × 3.6 % ≈ 7.6 % |

Resulting “typical” WACC for UGI in 2025 is roughly 7–8 %. The exact figure will differ if you use the firm’s disclosed capital‑structure and bond yields, but the range is a useful benchmark.

3. Comparing dividend yield to cost of capital

Metric	Approximate value (using $145 price)
Annual dividend	$1.50
Dividend yield	1.0 %
WACC (cost of capital)	≈ 7.6 %
Yield vs. WACC	Yield is ~1/7.6 ≈ 13 % of the cost of capital.

Interpretation

The dividend yield is far below the cost of capital. In other words, the cash‑return a shareholder receives from the dividend today (≈ 1 %) does not even cover the return that would be required to compensate for the risk of the business (≈ 7–8 %).
For a pure “income” investor, a 1 % yield would be considered modest, especially for a company in the energy‑distribution sector where many peers target 3–5 % yields to reward stable cash‑flow generators.

4. Does the dividend provide an attractive risk‑adjusted return?

4.1. The dividend alone

Risk‑adjusted return = (Dividend yield) – (Cost of equity) ≈ 1 % – 9.5 % = ‑8.5 %
→ The dividend, taken in isolation, does not compensate investors for the equity risk of holding UGI shares.

4.2. Total expected return (dividend + price appreciation)

Dividends are only one component of a shareholder’s total return. To gauge the attractiveness of the investment, we need to consider:

Component	Typical expectation for a stable energy distributor
Dividend yield	1–3 % (UGI’s is at the low end)
Earnings growth	Historically 2–4 % annual earnings per share (EPS) growth; modest for a mature distributor.
Share‑price appreciation	If the market values UGI at a stable P/E (e.g., 12–14) and earnings rise 3 % YoY, the price could climb roughly 3 % per year.
Total expected return	1 % (dividend) + 3 % (price) ≈ 4 %

Even with optimistic earnings growth, a total return of ~4 % still falls short of the ≈ 7–8 % cost of capital, implying a negative risk‑adjusted excess return (i.e., a negative NPV if discounted at the WACC).

4.3. Why might investors still hold UGI?

Reason	How it mitigates the low yield
Strategic positioning & cash‑flow stability – UGI’s business model (distribution of natural‑gas, petroleum, and specialty chemicals) generates steady, predictable cash flows that can be reinvested in growth projects, debt reduction, or future higher payouts.
Potential for dividend growth – The current payout ratio is likely modest (typical for a distributor with a 30–40 % payout). If earnings improve, the board could raise the dividend, lifting the yield over time.
Defensive sector characteristics – Energy‑distribution firms often have low beta (≈ 0.9) and stable demand, which can be attractive in a risk‑averse portfolio even if the current yield is low.
Tax considerations – Qualified dividends may be taxed at a lower rate than ordinary income for some investors, slightly improving after‑tax yield.

Nevertheless, from a purely quantitative risk‑adjusted‑return standpoint, the current dividend alone does not deliver an attractive return relative to UGI’s cost of capital.

5. Bottom line & actionable take‑aways

Assessment	Detail
Dividend yield	≈ 1 % (based on a $145 share price).
Cost of capital (WACC)	≈ 7–8 % (typical for a mid‑size energy distributor).
Yield vs. cost	Yield is ≈ 13 % of the cost of capital → substantially below the hurdle rate.
Risk‑adjusted return	Dividend alone yields a negative excess return; even total return (dividend +  modest price appreciation) is likely below the WACC.
Investment implication	For investors seeking income or high risk‑adjusted returns, UGI’s current dividend is not attractive on its own. The stock may still be a component of a defensive, cash‑flow‑focused portfolio, but investors should expect limited upside unless the company raises payouts or improves earnings growth.

What a prudent investor could do next

Check the actual market price on 6 Aug 2025 (or the most recent close) to compute the exact dividend yield.
Review UGI’s recent earnings releases (e.g., FY 2024 and Q2 2025) to gauge EPS growth trends, payout ratio, and any guidance on future dividend policy.
Obtain the firm’s disclosed WACC (often reported in the 10‑K or investor presentations) to replace the “typical‑range” estimate with the company‑specific figure.
Compare with peers (e.g., Williams Companies (WMB), Pioneer Energy (PNR), Energy Transfer (ET)) to see whether UGI’s yield is unusually low or in line with sector norms.
Determine portfolio fit – If you need a stable, low‑beta exposure to energy distribution, the low yield may be acceptable; if you require income generation, you may look for higher‑yielding peers or consider a bond‑allocation instead.

TL;DR

Current dividend: $0.375 × 4 = $1.50 per share → ≈ 1 % yield (assuming a $145 share price).
Estimated cost of capital: ≈ 7–8 % (typical WACC for a UGI‑type distributor).
Yield vs. cost: The dividend yield is far below the cost of capital, delivering a negative risk‑adjusted return if considered in isolation.
Overall attractiveness: Unless UGI lifts the payout or accelerates earnings growth, the dividend alone does not provide an attractive risk‑adjusted return for investors. It may still be a defensive holding for those valuing cash‑flow stability, but income‑focused investors should seek higher‑yield alternatives.