AABP Award 728x90

Progress Energy adds power to a portfolio


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Dear Mr. Berko:

My son is an electrical engineer and seems to know a lot about utility companies. We have dinner once a week, and he always gives me stock market advice, which has turned out well. Last year, he had me sell most of my utility stocks, including Progress Energy. Now he wants me to buy back the 300 shares I sold more than a year ago at $47. I expressed doubt, because I don’t like buying back things I have sold earlier. Please tell me what you think.

W.W., Oklahoma City

Dear W.W.:

Progress Energy Inc. (PGN-$38.36) is the result of a November 2000 merger between Carolina Power & Light and Florida Progress. From the 1950s through the 1990s, Florida Progress was as near to God as marriage, family, love, trust and good friendship.

Back in the 1950s, ’60s and ’70s, retirees bought shares of Florida Progress because the dividends covered their power bills. But when Carolina Power & Light offered $54 a share plus an interest in four synfuel plants, Florida Progress lost its virginity and its icon status in the Orange Blossom State. That was nearly 20 points and 35 dividends ago. Though this new power company might not have the intoxicating scent of the orange blossom, the merger enabled it to combine its activities and derive solid efficiencies from the economies of scale.

Earnings last year were $2.94 a share; this year PGN expects to report $3.05, and in 2010 Wall Street believes PGN will earn $3.25. This means that PGN’s $2.48 dividend, which was raised in 2009 and yields 6.5 percent, is moderately well covered. And if the CEO were to be asked about the dividend, which has been raised in each of the past 20 years, he would tell you that the board will continue increasing the dividend at a consistent rate for the foreseeable future. I like that.

This $9.5 billion revenue utility trades a few dollars above its $34 book value. There are only 272 million – not billions or zillions – shares out, including the 14 million shares sold in January for $523 million to be used to pay down short-term debt. Meanwhile, PGN feels so strong about its ability to earn a profit that it reduced its Florida rate fuel charges. PGN is 58 percent gas and coal, 28 percent nuclear and 14 percent purchased power.

This company has good management and significant cash flow, trades at a comfortable 12.6 times expected 2009 earnings, and offers a three- to five-year growth forecast of 5.3 percent and net margins of 8.5 percent. Meanwhile, independent and respected Argus Research believes that expense controls are permanently in place and that free cash flow will continue to grow and remain strong. Argus believes that PGN’s efficient generating plants, its declining construction spending, its broad geographic diversity (the Carolinas and Florida), the divestiture of poorly performing non-core assets and its excellent balance sheet will allow it to deliver consistently solid results.

This stock isn’t going to produce blockbuster gains, but I think over the next decade it can give you a 10 percent to 12 percent total return. That’s a dandy number for lots of fine folks who want good, dependable dividend income plus modest growth and low volatility.

Your son’s utility instincts are solid. Please tell him I said so.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. © Copley News Service

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