Progress Energy Adds Power to a Portfolio by Malcolm Berko on Creators.com

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Progress Energy Adds Power to a Portfolio

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 I do the cooking — you've never seen a man eat so much — 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 a year ago at $47. I expressed doubt at his advice because I don't like buying back things I have sold earlier. Please tell me what you think. He told me to write and said that you would agree with him. — W.W.: Oklahoma City

Dear W.W.: Progress Energy (PGN-$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. This stock was revered by Floridians and provided attractive dividend income for Florida retirees.

Back in the 1950s, '60s, and '70s retirees bought shares of Florida 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 20 points and 35 dividends ago. While 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. This merger made good sense.

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, yields 6.9 percent and, is moderately well covered. And if the CEO were to be asked about the dividend, which has been raised in each of the last 20 years, he'd tell you that the board would continue increasing the dividend at a consistent rate for the foreseeable future.

I like that.

This $9.5 billion revenue utility trades a few pennies 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 recently reduced its Florida rate fuel charges. PGN is 58 percent gas/coal, 28 percent nuclear and 14 percent purchased power.

This company has good management, significant cash flow, trades at a comfortable 11.2 times earnings, 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 despite the economic slowdown.

Your son is giving you excellent advice. 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. And that's a dandy number for lots of fine folks who want good, dependable dividend income plus modest growth and low volatility. The $34 level might be a super entry point considering its $31.50 to $45.50 trading range in the last dozen months.

Your son might eat like a trencherman, but his utility instincts are impressive. Please tell him I said so. And you may not have to cook much in the future because I believe there could be a new theme restaurant opening in OKC called "All You Can Eat to Go!"

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@comcast.net. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.