Despite Slow First Quarter, Duke Energy Remains A Safe Dividend Play
Summary Duke Energy’s first quarter 2015 EPS of $1.24 beat estimates by $0.10, while Revenue of $6.06 billion missed expectations by $240 million. The company’s residential retail energy market declined as a result of more efficient energy practices and the company’s international business segment declined due to issues n Brazil. I believe Duke Energy stock presents a safe dividend play with opportunity for slow stock appreciation going forward. On May 1, 2015, Duke Energy Corporation (NYSE: DUK ) reported their first quarter of 2015 earnings results and provided an update on their four financial objectives for 2015 and beyond-(1) current year earnings guidance, (2) long-term earnings growth, (3) dividend growth, and (4) balance sheet strength. In this article, I will review the company’s four financial objectives and analyze their progress in obtaining them. Achieve 2015 earnings per share within guidance range of $4.55 and $4.75 Capital expenditures are expected to fall within the range of $7.4 and $7.8 billion for the year. In the first quarter of 2015, the company had $1.45 billion in capital expenditures putting the annualized projection to $5.8 billion. While the capital expenditures projection is lagging behind projections, management expects the economic development usage of the expenditures to result in almost 3,000 new jobs as the company makes commitments to pursue alternative energy generation sources. The company saw retail load growth of 0.5% to 1.0% for the year. The weather normalized retail growth rate decrease 0.2% year-over-year largely due to the 2014 polar vertex. The strong performance in the industrial market was offset by the disappointing residential market performance. The residential market experienced lower usage year-over-year due to changes in energy efficiency and conservation, polar vertex in 2014, and higher use of multi-family housing. There were 700M average shares outstanding at 12/31/2015. The company had 708M outstanding shares at 3/31/2015, up from 707M at 12/31/14. The company does not have any planned equity issuances through 2017. We saw $65 per barrel average Brent crude price for 2015. Oil price projections have remained consistent to projections as the expected Brent crude oil prices have increased from EIA’s February 2015 report of $57.56 to $61 in May 2015’s report . The joint venture, National Menthol Company (NMC), which runs through 2032, is 25% owned by Duke Energy. NMC’s earnings are positively correlated with crude oil prices and an approximate $10 per barrel change in the average annual price of Brent crude oil has roughly a $0.01 to $0.02 EPS impact annually. There was an exchange rate of approximately 2.85 BRL/US dollar. The exchange rate has increased above this expected rate to $3.01 on 5/13/2015 as the Brazilian economy struggles and the US economy rebounds. The continued drought conditions, struggling Brazilian economy, and weaker foreign currency exchange rates are the largest factors behind the $0.13 year-over-year quarterly earnings per share decline in the company’s international segment. The ongoing drought in the country has caused the company to dispatch higher cost thermal generation instead of the low cost hydro generation. Additionally, the struggling economy has caused the company to lower demand growth for 2015 between 0% and 2%, which is much lower than the greater than 3% seen over the past several years. Deliver earnings per share growth of 4% to 6% through 2017 There was retail load growth of 1% going forward. The company has been stagnant with a 0.6% retail load growth from 2012 and 2014. As seen by the decrease in the first quarter of 2015, I think it is going to be very difficult for the company to achieve a 1% growth going forward. I think it is going to be difficult to achieve because of the lower energy usages in homes. I don’t see this trend reversing and allowing this 1% growth rate to be achieved. The company expects total wholesale net margin to increase due to the new 20-year contract with NCEMC at Duke Energy Progress (began in 2013) and 18-year contract with Central EMC at Duke Energy Carolinas growing to a load of 900MW in 2019 from 115MW in 2013. FY2015’s total wholesale net margin is expected to be approximately $1.1 billion with an anticipated 5% compound annual growth rate. The regulated earnings base growth is expected to follow the $2 billion growth trend in 2015 that was seen in 2014. Continue growing the dividend within a 65% to 70% target payout ratio On May 7, 2015, Duke Energy declared a quarterly cash dividend of $0.795 per share, in line with previous quarterly dividends. Management expects the dividend to rise to $3.24 per share in 2015 (almost 2% increase year-over-year). With the Company achieving a payout ratio close to 70% and management’s commitment to paying out a quarterly dividend to investors, I do not see the company’s current 4% dividend yield to be at risk. Management has paid 89 consecutive years of dividends with increases coming the past 7 years. This is largely possible due to the Company’s strong balance sheet and no planned equity issuances through 2017. In addition, the company announced a strategically tax-efficient way to repatriate $2.7 billion back to the U.S. during the fourth quarter 2014 earnings call, which will help fuel the dividend increases going forward. Maintain strong, investment-grade credit ratings. While the company’s credit rating was recently upgraded by S&P, I believe there are three primary risks for the company going forward. The exposure to Brazil is a significant risk for the company’s future, which was seen in the 2014 financial results. In 2014, there was a decrease in sales volume as well as higher purchased power costs due to the interruptions in the hydrology production. Per the earning’s call, they are assuming normal hydrology despite the rainy season starting slowly. Brazil is a major story to follow for Duke Energy in 2015 and beyond as the Company is predicting EPS growth from this business segment despite recent downward trends in profits there as well as the Brazilian economy. I think the company will have difficulty increasing the retail load growth to 1% given the increased technologies and social initiatives to decrease electric use. Oil prices will continue to be a wild card going forward. Forecasting a price on such a volatile asset is a difficult task. If oil prices continue to fluctuate widely, it will significantly impact the company’s bottom line. Conclusion Duke Energy faces some difficult obstacles including a slowing Brazilian economy, lower residential energy usage, and volatile oil prices; however, I believe that the company gave conservative and very obtainable estimates in each of the key assumptions used to allow them to meet their financial objectives for FY 2015 and beyond. While I don’t see Duke Energy being a rapid growth story going forward which can be seen in the lagging capital expenditures, I do believe they have the ability to present slow stock appreciation with the safety of a consistent dividend. Disclosure: The author is long DUK. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.