A First Look at PG&E (PCG).

Bonds outstanding: $394.5 million; nothing big is due anytime soon.

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What the company does – PG&E is a holding company whose main subsidiary is Pacific Gas and Electric, a regulated utility operating in Central and Northern California that serves 5.1 million electric customers and 4.3 million gas customers in 47 of the state’s 58 counties. The fully regulated utility owns 118 power plants in California that provide about 40% of the utility’s power needs. In 2004, PG&E sold its unregulated assets as part of its post-bankruptcy reorganization.

Morningstar’s take – Since PG&E emerged from bankruptcy in 2004, it has posted among the best earnings growth of any regulated utility in the United States. Constructive California regulation following the 2000-01 state energy crisis has led to generous rates and huge investment opportunities for the state’s investor-owned utilities, including PG&E, Edison International EIX, and Sempra Energy SRE. But in the short run, inflation threats, costs from the September 2010 San Bruno gas pipeline explosion and regulatory pushback could have an outsize effect on PG&E.

DIVIDEND RECORD – PG&E has been paying dividends since 2005 (it emerged from bankruptcy in 2004).  It has been growing its dividend steadily.  In 2007 the quarterly dividend was $0.36; now it is $0.46.  That is an increase of 27% over five years.

Dividend: $0.46 quarterly

Dividend yield: 4.4% ($1.80 annual dividend / $40.85 share price)

Dividend payout ratio: 72% based on Google Finance EPS of $2.51 per share or 65% based on the six year average adjusted EPS of $2.75 per share

[My standard 5 year dividend chart from Google Finance isn’t working – sorry!]

EARNING POWER – $2.75 six year average adjusted earnings per share @ 405.88 million shares

(Earnings adjusted for changes in capitalization)

EPS

Net income

Shares

Adjusted EPS

2006

$2.76

$991 M

346 M

$2.44

2007

$2.78

$1,006 M

353 M

$2.48

2008

$3.63

$1,338 M

358 M

$3.30

2009

$3.20

$1,220 M

386 M

$3.01

2010

$2.82

$1,099 M

392 M

$2.71

2011 (est)

$2.57

$1,028.88 M

405.88 M

$2.53

EPS

Net income

Shares

Adjusted EPS

2011 Q1

$0.50

$199 M

397 M

$0.49

2011 Q2

$0.91

$362 M

400 M

$0.89

2011 Q3

$0.50

$200 M

404 M

$0.49

2011 Q4 (est)

$0.66

$267.88 M

405.88 M

$0.66

2011 total (est)

$2.57

$1,028.88 M

405.88 M

$2.53

Six year average adjusted earnings per share is $2.75

Consider contrarian buying below $22.00 (8 times average adjusted EPS)

Consider value buying below $33.00 (12 times average adjusted EPS)

PG&E is currently trading at 14.85 times average adjusted EPS.  This is priced for investment.

Consider speculative selling above $55.00 (20 times average adjusted EPS)

BALANCE SHEET – Weak balance sheet despite the bankruptcy in 2004.  Look at all that red (liabilities).  I don’t like the really low quick ratio (cash assets/current liabilities).  It isn’t even close to 1.0.

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Book value per share: $29.46

Price to book value ratio: 1.39 (under 1.0 is good)

Current ratio: 0.86 latest quarter (over 2.0 is good)

Quick ratio: 0.32 latest quarter (over 1.0 is good)

Debt to equity ratio: 0.97 (lower is better)

CONCLUSION – PG&E appears to be a dedicated dividend payer and slight dividend grower since it emerged from bankruptcy in 2004.  It pays a decent dividend of 4.4% yield; however, I wouldn’t buy it until the price drops below $30.00.  PG&E would be a high dividend stock yielding 6% at the current dividend at a price of $30.00.  It would also be a value stock below $33.00 based upon its average adjusted earning power of $2.75 per share.  Price to book value ratio would also improve to 1.0 under those circumstances.  You can see on the chart below that PG&E was a buy during the March 2009 lows.  Wait for the stock to retreat back to that level to get a better dividend yield and better opportunity of price appreciation.

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DISCLOSURE – I don’t own PG&E (PCG).

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Published in: on February 1, 2012 at 12:33 pm  Leave a Comment  

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