Stock of the week: Duke Energy

Summary

- Duke Energy (DUK.US) surged to fresh all-time high
- Electric utility remains key segment for the company
- Company increases investment into renewables
- 93 consecutive years of dividend payouts
- Full-year outlook upheld following Q2 earnings beat

Concerns over the condition of the global economy has drawn investors’ attention to sectors that often outperform broad market at times of an economic downturn. Duke Energy is such a stock and increased interest from traders pushed its price back to the all-time high. In this short analysis we will take a look at the company's investment plans, dividend policy and full-year forecasts.

Large-cap utility company

Duke Energy (DUK.US) is the second biggest utilities company in the S&P 500 index in terms of market capitalization. The company is divided into 3 different segments - Electric Utilities & Infrastructure, Gas Utilities & Infrastructure and Commercial Renewables. Electric Utilities & Infrastructure segment is by far the most important one for the company as it accounted for almost 90% of earnings in the second quarter of 2019. The segment operates in six states of the Southeast and Midwest regions, where it serves around a third of the population. Gas Utilities & Infrastructure segment distributes natural gas to over 1.6 million customers and is focused mostly on North and South Carolinas as well as Tennessee state. Last but not least, Commercial Renewables segment focuses on acquisition and development of wind and solar power units. The company owns 21 wind power facilities and around 100 solar power facilities in 19 states. Commercial Renewables accounted for less than 6% of income in the second quarter of 2019.

Margins of Duke Energy (DUK.US) were quite volatile this decade. However, a key point to note is that they are higher now than they were at the beginning of the decade and that they rose in the past two quarters. Source: Bloomberg, XTB Research

Major investment plan underway

However, the importance of renewables is likely to grow for the Duke Energy. The company is undertaking a major investment plan that will require a layout of around $10 billion each year until 2023. The company plans to increase renewables energy generation capacity, what can be seen as a positive development given the building regulatory trend. Namely, more and more states adopt Renewable Portfolio Standards that require utility companies to generate a certain percentage of power from renewable sources. Failure to comply with Standards is a basis to imposing a fine and some states hike penalties with each subsequent failure. The company is also investing into EV recharging infrastructure. While this is not a major investment at the moment, adoption of electric vehicles is expected to grow and recharging stations may prove to be decent and supportive revenue stream in case Duke continues to expand it. Among investments that Duke Energy has already made or plans to make over the next few years, one may also find “traditional” utility investments like improvements to electric grid or gas infrastructure.

For the major part of this millenia, Duke Energy had quite stable capital expenditures in the range of 20-30% of revenue. However, investments accelerated over the past few years and the ratio almost reach 39% in 2018. Source: Bloomberg, XTB Research

Long track record of dividend payouts

Just like other utility companies, Duke Energy has to a huge extent stable and predictable cash flows. Thanks to this, the company was able to pay a dividend for 93 consecutive years. Moreover, the dividend was raised each year for the past 13 years. The company plans to continue to hike the dividend but scale of increases is likely to be smaller due to taking on significant amounts of debt in order to finance investments mentioned earlier in the analysis. Another factor that hints at smaller dividend hikes is the payout ratio. The company targets long-term payout ratio of 65-75% and it has been exceeded in recent years therefore the company may not be eager to deliver major hikes. Quarterly dividend was raised to $0.9450 recently and it translates to a 12-month trailing dividend yield of 4%.

While a major cut to Duke Energy’s dividend coincides with the start of the global financial crisis, it was in fact due to the spin-off of the natural gas business. Following 2007 cut, dividend per share increased each year. Moreover, pace of dividend hikes exceed US price growth hinting that dividends are also growing in real terms. Source: Bloomberg, XTB Research

Full-year forecasts upheld after Q2 earnings release

Duke’s earnings report for the second quarter of 2019 surprised investors to the upside as the company showed better-than-expected results. Earnings per share for the April-June period reached $1.12 against $0.98 expected and $1.12 in the Q2 2018. Net income stood at $820 million marking a 3.8% YoY pick-up (median estimate pointed to a drop to $706.4 million). Improvement was also spotted in terms of revenue - sales increased from $5.634 billion in Q2 2018 to $5.873 billion now (+4.2% YoY). A key fact is that the company decided to uphold its full-year forecast of EPS falling into $4.80-5.20. Achieving the mid-point of the range (EPS of $5.00) would translate into EPS growth of over 6.1% YoY, the highest pace of earnings growth since 2014.

Duke Energy (DUK.US) stock caught a bid recently as concerns over the condition of the global economy mounted. In turn, a medium-term resistance zone ranging $90.50-91.20, marked by peaks from late-2017, late-2018 and the first half of this year, was broken. In turn, the price painted a fresh all-time high and the stock is now trading in an uncharted territory. Source: xStation5