Duke Energy (DUK, Financial) stock has performed very well over recent years, pushing its dividend yield down from a high of 7% to its current 4.4%. Does the company have growth plans to help sustain this dividend payout and eventually grow it back towards its highs?
The Business
Duke Energy is an energy company operating in the central and southern U.S. Their regulated utilities serve 7.3 million retail electric customers in six states representing a population of approximately 23 million people.
The company’s regulated utilities have diversified sources of power, reducing the impact of price or supply fluctuations of any one source.
Aside from its domestic regulated utilities business, the company also generates revenues from international sources in South America (12% of revenues) and renewable energy sales to commercial businesses (4% of revenues).
The International Energy segment is similar to its domestic business, with highly contracted revenues providing stable cash flow generation.
The Commercial Power segment operates under long-term contracted projects with creditworthy counterparties. This provides utility-like stability primarily through renewable generation.
Growth Opportunities
Management wants to grow long-term EPS at a 4-6% annual rate. To accomplish this, the company has targeted $16-20 billion worth of investment projects that will help grow the earnings base. The company believes they have enough investment projects already earmarked to help them grow through 2018.
Ownership
While it’s not too uncommon with utility companies, Duke’s management team owns fairly little of the company, possibly misaligning their interests with shareholders.
Interestingly, Duke shares are being simultaneously bought and sold by numerous Gurus. In their latest filings, Ray Dalio (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), and Ken Fisher (Trades, Portfolio) all either initiated or added to their positions. Jim Simons (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), and Bill Frels (Trades, Portfolio) meanwhile all either reduced or completely sold out.
Dividend
What can investors expect in terms of a dividend payment? Duke has been growing the dividend annually, but at a rate slower than the growth in EPS, leading to its current 65-70% target payout ratio, which it intends to hold. Duke now anticipates growing the dividend along with EPS growth.
Barring fluctuations in the share price, this would mean that investors can expect a dividend yield that is in the mid-range of Duke’s major competitors.
Valuation
It looks like Wall Street agrees with management’s ability to achieve their long-term EPS growth targets of 4-6%, with the average analyst expecting ~4.5% annual growth over the next five years.
For this year, analysts are expecting earnings of $4.66 a share.
Using GuruFocus’ DCF Tool, we can estimate that shares are roughly fairly valued if these earnings expectations end up correct. Keep in mind however that Wall Street estimates are at the low-range of what management targets.
Conclusion
Duke appears to be fairly valued with an attractive dividend yield in a low-interest rate environment. While it’s not the most exciting stock, income investors should remain interested in DUK shares.
For more ideas like this one, check out GuruFocus’ High-Yield Dividend Stocks List or the rest of R. Vanzo’s Articles.
