Utility stocks are one of the safest investment options. Primarily, domestic-focused, regulated, and mature utility companies provide basic amenities like electricity, gas and water to residential, industrial, as well as commercial customers.
Utilities are favored by investors due to steady returns, and the ability to pay dividend and buy back shares. Notably, capital-intensive utility companies are concerned about a steady increase in interest rates. Interest rates have increased nine times since December 2015, which in turn is increasing capital servicing expenses of these utilities and curbing their ability to pay out dividend. However, the Federal Reserve’s reduction of interest rates by 25 basis points and plans to implement additional rate cuts are indeed good news for the utility space.
Utilities are utilizing new technologies for the maintenance of infrastructure. Ongoing investment in transmission and distribution operations continues to increase grid resilience. Investment in battery storage projects is gaining importance due to a rapid decline in costs and greater comparative benefits received by utility players.
Installation of smart meters is helping users to make efficient use of electricity. Utilities are making considerable investment to produce more electricity from renewables and other clean sources of energy. Proper cost management, new electric rates and customer growth should continue to help the industry players to maintain operational stability. However, an aging workforce and adverse weather conditions are concerns for utility players.
After registering earnings growth of 2.6% in second-quarter 2019, the utility sector’s bottom line is expected to improve 2.8% in the third quarter on the back of year-over-year revenue improvement of 3.7%. The sector is expected to continue the momentum in the second half of 2019 as well. (For more details, read our weekly Earnings Trends report)
Amid such favorable trends in the utility space, we run a comparative analysis of two prominent electric power utilities — Dominion Energy, Inc. D and Duke Energy Corporation DUK — to determine which one performed better and is a suitable investment option right now.
Earnings Surprise Trend & Long-Term Growth
Dominion Energy reported average positive surprise of 0.57% in the last four quarters. Its long-term (three to five years) earnings growth is projected at 4.8%.
Duke Energy delivered average positive surprise of 4.75% in the last four quarters. Its long-term earnings growth is estimated to be 4.9%.
Estimates Movement
In the past 30 days, the Zacks Consensus Estimate for Dominion Energy’s earnings for 2019 has declined by a penny to $4.13 per share.
In the same time period, the Zacks Consensus Estimate for Duke Energy’s 2019 earnings has moved up 0.6% to $4.95 per share.
Return on Equity (ROE)
ROE is a measure of a company's efficiency in utilizing its shareholders' funds. Dominion Energy and Duke Energy's ROE stands at 11.74% and 8.02%, respectively. Notably, the industry's ROE currently stands at 9.44%.
Debt/Capital
Dominion Energy and Duke Energy’s debt/capital ratio stands at 56.63% and 55.19%, respectively, compared with its industry’s average of 49.43% and the Zacks S&P 500 composite’s 43.3%.
Price Movement
In the past 12 months, shares of Dominion Energy and Duke Energy have gained 9.7% and 14.2%, respectively, compared with the Zacks Utility – Electric Power industry’s 13.2% rally.
Price Performance (One year)
Market Cap and Zacks Rank
Dominion Energy currently carries a Zacks Rank #3 (Hold). The company has a market capitalization of around $61.66 billion.
At present, Duke Energy holds a Zacks Rank #3. It has a market capitalization of $67.23 billion.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Verdict
Both the utilities have widespread operations in the United States. Also, the companies have plans to carry out substantial capital investments for strengthening existing operations.
Considering Duke Energy’s earnings surprise history, positive movement in estimates and price movement, we consider it to be a better investment option than Dominion Energy at the moment.
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