Tuesday, December 20, 2011

What's Not to Like in Portland?

Portland General Electric (POR:  NYSE) is priced to yield 4.3% on its quarterly dividend.  That is definitely something to like in a world where interest rates are at record low levels.  A low beta of 0.50 makes the risk of equity ownership palatable even for a risk averse investor.  Although POR is trading near its 52-week high, it’s trailing price earnings ratio of 13.2 is slightly below the average for electric utilities.  Nice dividend, low risk, slightly below fair price.

That all sounds so compelling.  However, there is a dark lining in this silver cloud.  None of the dozen or so analysts following the company think there is much growth ahead for Portland.  Maybe they are simply gun shy because the company has missed the consensus estimate in three of the last four quarters.  Presently the consensus view is for flat or slightly lower earnings next year.  The dividend does not appear to be in jeopardy, but Portland is apparently facing flagging demand and margin pressures.  Indeed, unemployment is around 9.1% in the Company’s service area. 

This is not an unusual scenario.  Weak economic conditions have all consumers and businesses trying to economize on utility bills.  Since this is a transient situation and likely to reverse on improved employment conditions, it may be more relevant to look at Portland in the long-term.

For a utility of modest size  -  the Company recorded $1.8 billion in revenue in the most recently reported twelve months  -  Portland appears to be more progressive than most.  The investment has left profit margins and returns on equity and assets below industry averages.

Portland has been trying to create value through a renewable energy program and toxic emissions reductions.  Granted this is not entirely voluntary.  Government mandated minimums for “green” electricity and law suits by environmental groups are clearly at play in Portland’s investment decisions.  That said, it is likely the cost of early investment in renewable energy sources and emissions control equipment in the near-term is lower than future costs of non-compliance. 

In 2010 and 2011 PGE won top ranking by National Renewable Energy Labs for the number of renewable customers.  The accomplishment gives Portland effective bragging rights to customers and advances the management team well along on the renewable energy learning curve. 

The company is also well along on the emissions control learning curve.  Portland is installing the usual scrubbers and filters at its Boardman coal-fired power plant.  However, it has also staged successful beta tests of microalgae as a carbon sink for Boardman.  Can algae represent cheaper carbon sink alternative to sequestration underground?  That answer is not yet available, but we expect Portland to have that answer perhaps before the next utility.

Neither the author of this article, Crystal Equity Research nor its associates have a beneficial interest in the stocks mentioned in herein.

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