Can You Bet On Duke?
Summary There are multiple concerns with the company right now regarding lawsuits and blackouts, but this company is taking all the right steps towards clean energy to foster long-term growth. Focusing in on the stock’s current level after August/September volatility is key to deciding whether or not an entry point is plausible right now. It’s consistent dividend, but inconsistent cash flow is worrisome, yet I believe the company will pull through.. Duke Energy (NYSE: DUK ) is one of the most stable companies in my portfolio, but is starting to really look like a growth story based upon the ventures its undertaking. The stock rose quite confidently through August before getting hammered by speculation on the Fed in September. I view the mid-September bottom as the lowest level for the rest of the year, unless more Fed speculation develops. I’d argue that Duke is going to trend higher based upon internal factors now, as their shift towards clean energy is creating significant long-term growth opportunities. Performance It’s been a while since I last wrote on Duke, and probably fair enough considering it’s a utility company and its catalysts typically aren’t notable enough to reiterate on a short time frame. Duke, however, is special. This company is constantly in the news, whether it’s about the coal basin fines or its movement to get low-cost energy to east coast residents in a variety of ways, creating a lot of activity in the stock. You can view the YTD trend below: (click to enlarge) Source: StockCharts Growth Catalysts I use this company primarily as a safe investment because I believe utility companies, in theory, are very stable and predictable investments. While the YTD price trend won’t necessarily agree with me, Duke is starting to present itself as a great growth opportunity and to really clarify the forward-looking catalysts, I’m examining the following: Duke has applied for a permit to build a solar facility in Osceloa County in Orlando, FL by spring 2016. This solar facility is expected to bring 500 MW to the county by 2024, which makes it a very large-scale project. Duke is applying for a permit next month to build a natural gas plant in Asheville. It’s approval could come by the end of this year and would serve as a significant catalyst for the stock. They’re closing their already standing electric steam plant in Asheville (378 MW) and replacing it with this new plant, whose capacity is 650 MW. Since 2008, the company has spent $4 billion on wind and solar projects, which helps replace the energy needs of its customers as more coal-fired power plants are retired; while this is the more long-term direction of the company, but is a solid basis for those considering a long position Hurricane Joaquin could negatively impact the stock depending on the number of blackouts that occur and are attributable to Duke Expenditures to close the coal ash basins in an environmentally responsible manner will continue to occur, with the most recent payout being $7 million. They’re due to pay another $10-15 million by 2029 for this location. Fourteen total basins are required to be closed. The $90 million Indiana power plant payment has already been priced into the stock, in my opinion. Marginally lower utility rates for South Carolinians thanks to lower natural gas and lower coal prices. The finishing of several natural gas pipelines from the Marcellus is going to bring low-cost energy to east coast residents, allowing Duke to take advantage. These pipelines have been stalled from completion in the past, but are on track to finish by mid-late November. Keeping an eye on treasury yields is a good idea as these generally move in an inverse trend to utility stocks like Duke. As a further consideration, Duke has been one of the biggest movers on interest rate speculation in recent months and if interest rates do get hiked, Duke will see a noticeable pullback. I do not believe the Fed will hike rates in October, but there will still be added volatility as we near Yellen’s next speech. What’s notable about these growth catalysts is that Duke is moving away from harmful, nonrenewable energy sources towards cleaner fuels like natural gas and solar, which helps to not only make this company more of an ethical investment, but also helps it to reduce operating costs in the long-term and service a wider range of individuals. When you think about that value proposition, it’s hard to not justify an initial entry into the stock right now. From a financial standpoint, I think this company is heading into Q3 earnings with a lot of confidence. It has its highest TTM ROE in two years at 6.91%, and revenue, net income, and EBITDA are all up from a low Q1, which can springboard some easy growth rates for the next earnings report. Additionally, Duke is in constant conversation with federal and state governments about lowering the tax burden that they currently face. If this can retract even a percentage point, Duke is going to be in that much better position. Dividend Consideration The stock is currently yielding 4.67% and it’s worth noting that this is the 88th year in a row that Duke has paid a dividend, that’s nothing short of pure consistency. The dividend that was paid out on Sept. 16 was up 3.8% from the previous payout. Furthermore, the TTM payout ratio is 94.6% – that’s exceptional. The 5Y growth rate seems low at just 2.24%, but the payout is high enough to appease my concerns. Now, there are concerns about whether or not this company can continue to pay its high dividend given its current level of cash flows. OCF has been steady the last two quarters at $1.44 billion, and it’s worth noting that Q3 2014 showed the highest quarterly OCF in two years at $2.55 billion, which is going to create high expectations come the ER. FCF is unfortunately all over the place, due to their debt reduction/issuance activity, and is currently negative at -$212 million for Q2. TTM FCF is $797 million. Essentially, the company shells out anywhere from $551-$565 million in dividend payments every quarter and has not failed to pay these dividends in a very long time. Thinking that Duke may cut its dividend or not payout is not a current concern, despite less than ideal cash flows. Conclusion We’re a while out from the Q3 earnings report in the first week of November, we have a lot to consider about this company’s financial health and valuation. Current P/E is 18.29 which is above the industry average of 15.04, but I’d argue that this is very marginal, all things considered. Duke, to me, is a company that you place a long position into and let it sit and provide you a modest annual return and a good stream of consistent and growing dividends.