Progress Energy (PGN)
has been providing very attractive returns to investors during a turbulent stock market. Now Duke Energy (DUK)
and Progress Energy are pursuing a merger to become a power giant — the largest public utility company in the United States.
In January 2011 the two utility companies announced their agreement to merge, resulting in a company with more than 7 million customers. The terms of the merger agreement have Progress Energy shareholders receiving 2.625 shares of Duke Energy for each PGN share they own.
At the time of the merger, Duke Energy will put into effect a 1-for-3 reverse stock split. The number of Duke shares received by Progress Energy investors will be adjusted accordingly.
The new company will provide electricity service in the Carolinas, Florida, Indiana, Ohio and Kentucky. After the merger, Duke Energy will own 57,000 megawatts of energy production capacity.
For the second quarter, Duke Energy earned 33 cents per share and the consensus analyst estimate for full year earnings is $1.38, compared to $1.43 earned in 2010. Duke currently pays a 25 cents per share quarterly dividend.
For the same quarter, Progress Energy earned 71 cents per share and is projected to earn $3.13 for the full year, up from actual earnings of $3.06 in 2010. The company currently pays a 62 cent quarterly dividend. Both stocks have dividend yields of about 4.8 percent.
The merger is expected to complete by the end of 2011. Progress Energy shareholders approved the move in an August shareholder meeting. At the current dividend rates and share exchange rate, Progress Energy shareholders will see a 3 percent increase in their dividend rate, but not yield. Currently PGN is trading at about a $1.50 discount to DUK multiplied by the exchange ratio.
Recently, Jefferies & Company analysts reiterated their hold rating on Duke Energy but increased their target price. To end up with 100 shares of DUK after the merger and reverse split, an investor should buy 115 shares of PGN, if the goal is to take a little arbitrage on the value differential.
Both companies next report on Nov. 3.
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