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An investment in Portland General Electric Company (NYSE:POR), or PGE, has not fared well over the last 10 years as the share price is only up slightly more than 27% during this period.
Despite a weak return on the stock price, the company has a dividend growth streak of nearly 20 years and is currently offering one of its highest yields in more than a decade. Shares also trade at a discount to the utility sector’s median valuation and to the stock’s historical earnings multiple.
This article will take a deeper dive into the stock to see why I find PGE to be a utility name investors should consider buying.
Company Background and Business Analysis
PGE is a utility company that provides electricity to nearly 934,000 retail customers in 51 cities in the state of Oregon. About half of the state’s residential population and two-thirds of its commercial and industrial activity occurs within PGE’s service area. PGE owns or contracts more than 3.3 gigawatts of energy generation through gas, coal, wind, solar, and hydro sources.
PGE has a pretty balanced split of its retail deliveries. Residential customers made up 37% of deliveries last year, with commercial adding 34% and industrial contributing 29%.
PGE has benefited over the years from a high number of technology companies operating within its service area. This includes the likes of Intel Corporation (INTC), Lam Research (LRCX), and Adobe Inc. (ADBE).
The need for power generation has led to industrial load growth of 7.5% annually from 2018 to 2023. The growing demand for AI will require an increase in the production of semiconductors and data centers, which will drive demand for energy. PGE, with its customer pool being so important to the expansion of AI, will likely benefit from the greater demand for energy in its service area. Load growth is expected to be 2% per year through 2027, which is a solid figure given how much the company has gained in this area.
To meet this growing demand, PGE plans to invest $6.2 billion in its infrastructure, the majority of which is going towards its distribution business. Because of this, the company expects to see rate base growth of 8% on average through 2028 from 2022 levels. Further investment could drive a rate base CAGR of 9.2%.
Over the last decade, earnings growth of less than 1% per year has been just as lackluster as the return in the stock price. However, some of this is due to an expanding share count. Adjusting for that, net income has a compound annual growth rate (CAGR) of just over 3% for the period, which is still a very weak figure.
That is likely to change though as PGE is expected to see much higher growth over the next three years as analysts believe the company’s business should expand at a rate not seen in a very long time.
What is striking here is that 2024 is likely to be an impressive growth, but this will not be a one-time benefit to the company. PGE is still expected to produce mid-single-digit growth in 2025 and 2026 even as it comes off a very high base for this year. PGE’s own long-term guidance calls for 5% to 7% earnings growth, so the company and analysts are largely in agreement on what EPS could look like.
Valuation and Dividend Analysis
The company’s tailwinds, namely rate base growth and higher demand for energy, are like to provide meaningfully to PGE’s business in the near-term, which makes the stock’s valuation that much more attractive.
Shares of PGE closed Monday’s trading session at just under $43, implying a forward price-to-earnings ratio of 14. Looking at the last five years, the stock has averaged a price-to-earnings ratio of 19 while the utility sector median is closer to 16.
Factoring in a weak overall performance over the last 10 years with the more bullish guidance from management, I arrive at a price-to-earnings ratio range of 14 to 16 for shares of PGE. Using this range and the midpoint of company guidance, I have a price target range of $43 to $49. At worst, my price target range has shares at fair value, but PGE could return as much as 14% if the stock were to reach the high end of my projections.
It is not just the potential multiple expansion that is appealing, it is the company’s dividend that makes the stock an intriguing investment opportunity in my opinion.
PGE’s dividend has a CAGR of 5.2% for the 2014 to 2023 period, though that growth rate slows to 4.1% when looking at just the last five years.
While growth has slowed somewhat in the last five years, PGE announced that it was raising its quarterly dividend by 5.3% on April 22nd, 2024, extending the company’s dividend growth streak to 18 consecutive years. This follows the company’s 5% increase in 2023.
Back-to-back 5% raises, while not extremely exciting at face value, demonstrate that the slowing growth rate in the medium term could be a thing of the past and that future increases will be more of the long-term variety. Supporting this is the company’s own guidance for 5% to 7% dividend growth through the end of the decade.
On a forward basis, shares yield 4.7%, which compares very well to PGE’s own historical average and to that of the utility sector.
Shareholders today are getting a considerably higher yield than they are accustomed to seeing from PGE, while it is also above the utility sector median.
Further, this dividend is likely safe. The projected payout ratio for this year is 64%. This is just ahead of the stock’s 10-year average payout ratio of 61%, meaning that PGE can likely continue to increase its dividend moving forward.
Risk to Investment Thesis
Utility companies often must add debt to their balance sheet to fund capital investment projects. PGE is no different, as it has increased its total debt 42% from the end of 2020 to $4.74 billion in the most recent quarter. With higher interest rates comes higher costs associated with the company’s debt, as PGE’s interest expense has risen 32% since 2020.
A prolonged higher for longer interest rate environment, or even additional increases from the Federal Reserve, coupled with additional debt could impact PGE’s financial performance. This could keep the stock from reaching a higher multiple and limit the size of the dividend increases, causing total returns to be much smaller than anticipated.
Second, though PGE does have a high yield, investors can always choose safer investment products offering comparable yields. Treasury yields, even those with short durations, are providing yields at or above the level of PGE’s current yield. More risk-adverse investors could very well choose to own Treasury bills instead of income producing stocks to meet their needs.
Final Thoughts
PGE has not been a great investment over a long period of time, as the company has struggled to grow by a meaningful amount. Despite this, I think PGE is a solid investment option today, as the company is expected to see high single-digit rate base increases and a higher level of demand for its services. This should provide a lift to earnings growth.
Even better, the stock trades near the low end of my valuation range and offers one of its highest dividend yields ever. Therefore, total returns for PGE could reach into the high teens if shares can expand even a modest amount from their current levels, making the stock a buy for investors seeking income from an undervalued utility name.