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According to Reuters, Duke Energy (DUK) is closing in on a deal to buy utility holding company Progress Energy Inc. (PGN) for more than $13 billion dollars. The deal would increase Duke’s size by 36% and increase the pricing power of the combined utility companies
Duke would be able to expand its operations in North and South Carolina and gain a foothold into the Florida utilities market. Duke would gain access to22,000 megawatts of power. This looks like a good move for Duke as revenue growth is tepid and the company is looking to increase its revenue.
The deal isn’t really accretive to shareholders since Progress Energy is already valued at $13 billion dollars. The new company would have a market cap of $36 billion dollars and an enterprise value of $64 billion dollars.
Dividend investors may also find the new company quite attractive as Progress and Duke were both known for their generous dividend yields. Dividend investors love the utilities industry because the can make money off of the stable earnings and large free cash flows. These stocks have maintained their dividends even during the economic swoon of the past few years.
Duke Energy is currently yielding 5.5% and Progress Energy has a yield of 5.7%.
Related articles
- Duke Energy near deal to buy Progress Energy-sources (reuters.com)
Interesting move! The yield is good and being a utility company, dividends are quite stable. Now if only the PE was a little better…
Why does Enron immediately come to mind? I always smell fraud in the energy section. I don’t know why.
Don’t say that! I never know how Enron made money. They claimed that trading was the bulk of their revenue which was weird for a utility company.
Interesting. In the bigger picture, do you see the merger as a sign of the bull run continuing or do you just look at it as a single event/merger?
I see it more as a sign of utility companies trying to get greater pricing power and spread their costs out amongst a larger customer base.
Any tips on how to accurately value a utility company and determine if it’s cheap or not? I know they typically carry high debt levels. What p/e ratio should we aim for? What about other key statistics? I realize it’s general question…but I’m talking larger utilities..
Thanks.
Ps. Great site found it recently and have been reading daily.
Thanks Marc. I look for P/E ratios below 10 for large utility companies since they normally have low growth rates. I look for rising profits and a large amount of free cash flow. Dividend payouts are important to me as well. Stay tuned. I am doing a whole series on stats to watch for when investing.
Thank you. I look forward to the series.