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Portland General Electric Co. (NYSE:POR) May 11, 2009: $18.40
52-week range: $13.45 (Mar. 5, 2009) - $26.82 (Sep. 19, 2008)
Dividend = $0.245 quarterly = 5.32% current yield

Portland General serves about 810,000 customers in 52 cities in Oregon. Their revenue breakdown is 43% residential, 34% commercial, 23% industrial and other. Their generation is well diversified with coal, gas, hydro, wind, and purchased power sourcing.

Portland General will be forever remembered as being owned by Enron when that company sought bankruptcy protection. On April 3, 2006, POR shares owned by Enron were canceled and issued to Enron’s creditors.

Since most of the holders of Portland General shares did not actively buy the shares, there has been almost continuous selling pressure ever since the distribution through the Disputed Claims Reserve process.

POR shares behaved reasonably well until last October’s stock market meltdown. The final bottom of $13.45 was hit in early March when the company announced a secondary offering of $176 million in shares along with $430 million in long-term debt to fund capital needs. Since then the shares have bounced back to close last week at $18.58. Early today POR is offered at $18.40 /share.

Zacks is carrying 2009 – 2010 estimates of $1.80 and $1.96 making the valuation just 10.3x this year’s and 9.4x next year’s expectations.

The dividend was $0.68 in 2006 and has been raised each year to reach today’s annual rate at $0.98. Their 5.32% current yield looks pretty good in today’s low interest rate environment.

I see POR shares as low-risk because of the low multiple, their high yield and their stable, regulated utility business.

Here is a good way to play Portland General through December 18th:

On December 18, 2009 if POR is still > $17.50 /share:

The $17.50 calls will be exercised.
You will sell your shares for $17,500.
The $17.50 puts will expire worthless.
You will have collected $490 in dividends.
You will have no further option obligations.

You will hold no shares and $17,990 for your original outlay of $14,600.

That’s a best-case scenario net profit of $3,390 / $14,600 = + 23.2% [in less than seven and one-half months].

That best-case return would be achieved if the POR shares:

  • go up
  • remain unchanged
  • decline to $17.50 or (-5.8%) from trade inception.

What’s the risk?

If POR closes below $17.50 on Dec. 18, 2009:

The $17.50 calls will expire worthless.
The $17.50 puts will be exercised.
You will be forced to buy another 1000 POR shares and
to lay out an additional $17,500 cash.
You will have received $490 in dividends.
You will end up with 2000 shares of POR.

What’s the break-even on the whole trade?

On the first 1000 shares it’s their $18.40 purchase price less the $2.20 /share call premium = $16.20 /share.

On the ‘put’ shares it’s the $17.50 strike price less the $1.60 /share put premium = $15.90 /share.

Thus, your average price would be $16.20 + $15.90 / 2 = $16.05 /share.

Subtract the $0.49 in dividends /sh. and your net break-even = $15.56/share.

Portland General could drop by as much as $2.84 /share or (-15.4%) from trade’s inception without causing a loss on this trade.

Disclosure: Author is long POR shares and short POR options.