Summary
- Duke Energy's current dividend yield stands out in this low yield environment that has investors seeking income-generating investments.
- Duke Energy's total return potential is a bit lacking, but the dividend is secure - which is what will entice most shareholders.
- The stock is slightly undervalued on an earnings basis, which will provide some buffer should Duke receive anymore bad news regarding its pipeline project.
In a low interest rate environment, investors seeking income generation from their investments have flocked to stable, dividend-paying business models such as utilities. In this scenario, the two key points of emphasis in a potential investment are the dividend itself, and the sustainability of that dividend. Duke Energy Corporation (DUK) is potentially attractive due to a dividend that currently yields more than 4%. While the company is working through some challenges that subtract from the company's current total returns potential, the dividend itself remains sustainable for investors strictly interested in yield.
Duke Energy's dividend is a rarity in today's low interest rate environment. Not only do you have bond yields offering little value to investors (10-year notes are yielding just 1.76%), but this environment has created a chain reaction with investors flocking to dividend-paying stocks.
Source: YCharts
Utilities have been a popular sector for investors seeking bond alternatives because utilities pay a dividend, and provide regulated, essential resources to society. In other words, the business model is remarkably stable.
When looking for yield, Duke Energy stands out for good reason. Duke Energy is a larger utility with a market cap of $64 billion, and the current dividend yield of 4.29% is towards the higher end of the sector. In addition, management has raised the dividend payout each of the past 15 years. While a dividend growth streak of that duration is typically a good indicator of stability, there are some challenges that Duke Energy is currently working through.
Balance Sheet Woes
For starters, the company's balance sheet is quite burdened. It's actually quite common for utilities to carry large amounts of debt on their books. Capital investments are a huge part of the utility business as infrastructure is constantly being built and maintained. To fund this, utility companies will use a combination of debt and equity. In Duke Energy's case, the past several years of investments have included some large expenditures on renewable energy sources, as well as a large gas pipeline near the Atlantic Coast (more on that soon).
Source: YCharts
Duke Energy's leverage however has begun to creep quite high - even for a utility. Leverage ratios across the board are higher than earlier in the decade. In addition, the company is now hovering in the lower end of investment grade ratings by major credit agencies.
Source: Duke Energy Corporation
Management is forecasting 4%-6% EPS growth through 2023, so growth should be "okay" (for a utility) for the near future. The balance sheet is something that will need to be addressed if Duke Energy wants to utilize it for long-term growth aspirations. The company will need continual investment as it strives to further reduce its carbon footprint (cut back on coal) over the coming decades.
Legislative Hurdles
Duke Energy is also tangled in a legislative mess over its joint venture with Dominion Energy (D) and Southern Company (SO) to build a natural gas pipeline that would span more than 600 miles and transport gas from West Virginia to parts of Virginia and North Carolina.
Source: Duke Energy Corporation
The pipeline's total cost is a massive $7.3-$7.8 billion, of which Duke Energy is responsible for 47%. The litigation is surrounding environmental concerns, as well as potential disruptions to indigenous populations and will be heard by the Supreme Court of the United States. Assuming a favorable outcome, the pipeline will eventually come online in 2022.
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This article was written by Wealth Insights. A well-known investment author on Seeking Alpha with over 6,000 followers.
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