On Nov 27, 2015, we have issued an updated research report on Duke Energy Corporation DUK.
The largest power provider in the U.S., Duke Energy posted strong results in the third quarter of 2015 despite missing both the top and bottom line estimates. The utility saw improving earnings and revenues in the recently reported quarter aided by favorable weather and growth in the regulated business. Its regulated businesses have performed well this year delivering solid financial results. Moreover, the company’s systematic capital investment program and renewable asset expansion will likely be vital tailwinds.
Duke Energy is systematically and strategically boosting its regulated business mix through a series of acquisitions and divestitures. In Oct 2015, it announced plans to acquire Piedmont Natural Gas that will add a well-established natural gas business to the Duke portfolio. The deal is expected to close by the end of 2016 and will be accretive to earnings in the first full year after close. Strategically, this acquisition will lay the foundation for establishing a broader gas infrastructure platform within Duke Energy, based on its recent gas pipeline investments. It will complement Duke Energy’s existing gas LBT business in the Midwest. This acquisition will increase its total regulated business mix to over 90%, thereby supporting its earnings and dividend growth objectives.
The company continues to invest heavily in infrastructure and expansion projects. It has undertaken several projects in the Carolinas and Florida, comprising investments worth about $3 billion through 2018 with a capacity of about 3,000 megawatts. The company further expects investments to support its targeted earnings growth rate of 4% to 6% through 2017.
Redeploying the merchant generation sale proceeds and redirecting international cash into attractive regulated investments like the NCEMPA asset acquisition, the Atlantic Coast Pipeline and new generation will likely lead to attractive growth through the decade.
Duke Energy has a stable dividend payment history distributing quarterly cash dividend for 88 consecutive years. The company has increased its quarterly dividend rate every year since Jan 2007 after the spin-off of Spectra Energy. Its financial strength has made it possible for the company to maintain its long-term dividend payout ratio of 65% to 70% of its adjusted earnings per share.
As for the generation fuel mix, Duke Energy, in spite of commendable efforts to boost its renewable base, generated about 40% of electricity from coal, while solar, wind and hydroelectric accounted for a meager 8% in 2014. This is a cause of concern given increasingly stringent environmental regulations. On Aug 3, the U.S. Environmental Protection Agency finalized the Clean Power Plan, a regulation aimed at reducing carbon emissions from existing power plants by 32% by 2030.
Apart from that, Duke Energy’s International Energy segment witnessed yet another weak quarter on account of poor hydrology conditions in Brazil. Additionally, the struggling Brazilian economy has hit energy demand. The segment also exposes the company to foreign exchange risk. In the first nine months of 2015, the company’s international net income has declined by $199 million year over year.
Zacks Rank
The company holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the same sector include Ameren Corporation AEE, Calpine Corp. CPN and CMS Energy CMS, each carrying a Zacks Rank #2 (Buy).
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