Stock Analysis: Progress Energy, Inc. (PGN)
Linked here is a detailed quantitative analysis of Progress Energy, Inc. (PGN). Below are some highlights from the above linked analysis:
Company Description: Progress Energy, Inc. is a diversified energy company that owns two electric utilities serving approximately 3.1 million customers in North Carolina, South Carolina, and Florida.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
PGN is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuations and average the remaining two, PGN is trading at a slight discount. PGN earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
1. Rolling 4-yr Div. > 15%
2. Dividend Growth Rate
3. Years of Div. Growth
4. 1-Yr. > 5-Yr Growth
5. Payout 15% of avg.
PGN earned one Star in this section for 3.) above. PGN has paid a cash dividend to shareholders every year since 1937 and has increased its dividend payments for 21 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
PGN earned both of the available Stars in this section. The NPV MMA Diff. of the $10,999 is in excess of the $7,500 minimum I look for in a stock that has increased dividends as long as PGN has. PGN’s current yield of 6.91% exceeds the 3.17% estimated 20-year average MMA rate.
Other: PGN is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. Having discontinued the higher risk synthetic fuel business, PGN can now focus on its regulated utilities business in the Carolinas and Florida, which should enjoy above average customer growth and generally supportive regulatory environment. Going forward, the company’s primary focus is on the end-use and wholesale electricity markets in its service region. Risks include unfavorable regulatory rulings and a deeper than anticipated residential decline in Florida.
Conclusion: PGN earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks PGN as a 4 Star-Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $42.81 before PGN’s NPV MMA Differential fell to the $7,500 that I like to see. At that price the stock would yield 5.88%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $7,500 NPV MMA Differential, the calculated rate is -1.7%. This negative dividend growth rate is below the 0.8% used in this analysis, thus providing a margin of safety. PGN has a risk rating of 1.75 which classifies it as a medium risk stock.
Although PGN is quantitatively rated as a buy and it is trading below my buy price of $37.00, I have concerns about its dividend in the near-term. The company has experienced the adverse impact of the current economic recession while remaining intent on enhancing operational excellence, strengthening financial flexibility and growth.
In 2007 and 2008, PGN’s free cash flow per share was negative as a result of lower operating cash flows and higher capital spending. After seeing $2.3 billion of capital expenditures in 2008, PGN plans to spend approximately $6.3 billion over the next three years from 2009 through 2011, with about $2 billion spent in each year. For additional information, including the stock’s dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in PGN (3.0% of my Income Portfolio).
What are your thoughts on PGN?
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