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Duke Energy: Dividend Increase Coming – What Investors Should Expect

Summary Income investors flock to utilities for stable, high dividend yields. One of the most popular utility stocks is Duke Energy, which has paid dividends for 89 consecutive years. Duke should announce a dividend increase within the next few weeks. Management has a stated dividend policy relating to the company’s payout ratio, which can guide investor expectations. This article will outline what investors can reasonably expect when Duke Energy increases its dividend. Investors who buy utility stocks presumably do so for their strong dividend payments. Indeed, well-run utility stocks displayed a tremendous ability to pay dividends quarterly like clockwork, and even raise those dividends over time. They can do this because of their steady business models. After all, people will always need to heat their homes and keep the lights on, regardless of what the broader economy is doing. This results in a very reliable and consistent stream of profits, year after year. Within the next several days, it’s likely Duke Energy (NYSE: DUK ) will raise its dividend for shareholders. After yet another successful year, it’s that time once again for Duke to bump up its cash payout. The company typically increases its dividend in late June or early July, meaning another increase is coming soon. With all this in mind, here’s what Duke Energy investors should expect to receive in terms of a dividend increase. Slow And Steady Wins The Race Duke Energy fits the mold of a classic “widows-and-orphans” utility. It produces steady, albeit unspectacular, earnings growth, which then fuels modest dividend growth from year to year. Last year , Duke grew adjusted earnings by 4.3% year over year, to $4.55 per share. One reason for Duke’s earnings growth is that it is aggressively cutting costs in the aftermath of its acquisition of Progress Energy in 2012. Since then, Duke has realized approximately $550 million in operating and maintenance cost savings. Another key factor behind Duke’s success is that it operates a large regulated business. Among utilities, I favor the regulated operators, because regulated utilities frequently achieve favorable rate outcomes. This provides them with steady rate increases from year to year, which virtually ensures rising revenue. In fact, Duke’s regulated business was the major reason for its very strong performance in the first quarter . Duke grew adjusted EPS by 6% in the first quarter 2015, year over year, which represented a meaningful acceleration from its earnings growth in 2014. Duke’s regulated utility business led the way, with 5% earnings growth. This is a significant driver for Duke since its regulated business represents 85% of its total profits. Going forward, Duke expects to have another successful year in 2015. Management forecasts full-year adjusted earnings to reach $4.55 per share-$4.75 per share. This would represent as much as 4.3% earnings growth year over year. Last year, Duke Energy raised its dividend on July 1. The year before, the increase was announced on June 25. Therefore, investors should expect the company to increase its dividend very soon. Reasonable Expectations For A Dividend Increase Duke Energy has a long history of paying and raising its dividend. It has paid a dividend for 89 consecutive years and has increased its dividend for seven years in a row, since the spinoff of Spectra Energy in 2007. Duke Energy seeks to keep its dividend payout ratio at between 65%-70% of its adjusted diluted earnings per share. In 2014, Duke Energy raised its payout by 2%. The company projects a similar level of earnings growth this year as last year, so investors should reasonably expect a similar dividend increase as well. With all this in mind, I would expect Duke Energy to increase its quarterly dividend by 2% to $0.81 per share. Annualized, Duke’s dividend would reach $3.24 per share. This would represent 69% of Duke’s adjusted earnings per share expectations for 2015, at the midpoint of its forecast, and would fall right in-line with management’s stated dividend payout ratio policy. Duke Energy: Attractive Sector Pick Another 2% dividend raise this year, to $3.24 per share, would send Duke’s dividend yield up to 4.6% based on its recent $70 stock price. That’s a very attractive yield, both on an absolute basis, as well as in relation to many of Duke’s industry peers. For example, American Electric Power (NYSE: AEP ) yields 4%, while another close competitor, Exelon Corporation (NYSE: EXC ), yields just 3.8%. This makes Duke a very attractive pick within the utility sector. It’s true that Duke Energy’s payout still wouldn’t match up with all of its industry peers. However. Southern Company (NYSE: SO ) yields 5.2% right now. But I’ve written previously about why I believe investors should avoid Southern Company as it is encountering some significant fundamental business challenges. In conclusion, Duke Energy had a successful 2014, is off to another strong start this year, and if all goes according to plan, should pass along another dividend increase to shareholders very soon. For income investors looking for a stable, secure high-yield investment opportunity, Duke Energy should be on your radar. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

PPL Remains On Track Despite Spin-Off

When a company spins off part of its business, it may look like shareholders lost money, but in most cases, it’s just a technical adjustment. PPL’s stock hasn’t “fallen,” per se, but instead PPL shareholders now own a portion of newly-created Talen Energy, a stake of which they can do with what they want. After the spinoff, PPL management reaffirmed its 2015 ongoing EPS guidance of $2.05-$2.25, as well as its expected earnings CAGR of 4%-6% through at least 2017. Certainly there’s been a lot of share-price noise at PPL as of late, but the firm continues to execute, and we still like the utility. By Kris Rosemann PPL Corp’s (NYSE: PPL ) shares have been adjusted lower recently, as the firm officially completed the spinoff of its energy supply business June 1. The move finalizes PPL’s transition to a focus on regulated utilities in the US and UK. PPL’s spinoff, now trading under the name Talen Energy Corporation (Pending: TLN ), also includes the addition of RJS Power of Riverstone Holdings. As previously announced , all of the common stock of Talen Energy will be distributed pro rata to PPL shareholders. PPL shareholders received ~.1249 shares of Talen Energy common stock for each share of PPL owned as of May 20. Fractional shares were not issued; instead they were aggregated and sold in the open market, with the cash proceeds distributed pro rata to PPL shareholders. The affiliates of Riverstone Holdings will receive common shares of Talen Energy in compensation for RJS Power, resulting in their owning 35% of Talen Energy. PPL shareholders will own 65%. After the spinoff, PPL management reaffirmed its 2015 EPS from ongoing operations guidance of $2.05-$2.25, as well as its expected compound annual earnings growth rate of 4%-6% through at least 2017. The firm expects substantial rate base growth in the coming years, projecting a CAGR of 7% through 2019, though we note currency headwinds from its UK operations will continue to negatively impact earnings in the near term. Management also stated as recently as February of this year that it expects dividend growth potential to become realizable following the spinoff. The dividend potential of Talen Energy remains to be seen, but the assets that make up the company generated $4.3 billion in revenue in 2014. The newly-created firm will boast a competitive cost structure and the financial agility to pursue additional growth options. At its inception, Talen’s generation capacity of about 15,000 megawatts will be primarily located in the Mid-Atlantic and Texas, two of the largest and most competitive energy markets in the US. Its generation mix is approximately 43% natural gas or oil, 40% coal, 15% nuclear, and 2% hydroelectric. The energy-generating plants will continue to be operated and maintained by the same employees before the spin off, and the firm’s leadership team is partially comprised of former PPL leadership. The drop in PPL’s share price should not come as a surprise, and intuitively, it makes sense. Though at face value it appears that PPL shareholders suffered a decline in the value of their position, the spinoff is a net-neutral one in the sense that the value lost by PPL shareholders in the market will be realized by the receipt of new Talen stock and cash distributions. Our opinion of PPL is relatively unchanged following the spinoff, and we maintain the company is still one of the best-performing utility companies available. We see no need to adjust our holding of PPL in the Dividend Growth Portfolio, though we may view the new shares of Talen Energy as a source of cash. Our fair value estimate already reflects the anticipated spinoff. We value shares of PPL at $30 each at the time of this writing. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: PPL is included in the Dividend Growth Newsletter portfolio.

AES Corporation – A Long-Term Bet

Summary AES is well-diversified Fortune 200 global power company. An early mover in the energy storage business, AES appears to have a good strategic focus. The company’s stock appears to be undervalued relative to its peers. Headquartered in Arlington, Virginia, AES Corporation (NYSE: AES ) is a $17b global power company, which makes it a Fortune 200 company. It owns and operates a diverse portfolio of electricity generation and distribution businesses. I think the company is a good long-term pick because of the following 3 reasons: Global Diversification The company’s electricity generation and distribution operations are spread globally across 18 countries. In terms of power generation capacity, only 12GW out of a total of 36GW is generated by the company in the US. The company’s operations in emerging economies should help the company achieve higher growth rates over the next few years. Its operations in US and Europe should provide relatively lower but stable growth for the company. Such global diversification helps the company mitigate risk. Overall, I would argue that this geographical diversification is a good strategy, though some would argue otherwise citing the foreign exchange risk and the political risk that comes inherent with such strategies. Looking at the last quarter revenues and profitability measure of the company’s different Strategic Business Units (NYSEARCA: SBUS ), two observations stand out – First, while Brazil contributed the highest revenues (34%) amongst all SBUs, its profitability share was only 6%. A major contributing factor to the low profit margins from Brazil was the unfavourable foreign exchange impact. Second, Europe is contributing disproportionately higher profits to the company compared to its revenues. Combined, these individual inconsistencies a part and parcel of the company’s strategy of global diversification. Strong Strategic Focus The company has a reasonably good corporate and business strategy in place. In the last few areas, the company has exited some “non-core” markets and recycled the sell-off proceeds. Since September 2011, the company has exited 10 countries and raised $3b in equity proceeds. In the markets where the company believes it has a competitive advantage, $7 billion worth of projects are in the pipeline. These are expected to be completed in the period from 2015 to 2018. (Source: AES Investor Presentation, May 2015, www.aes.com/investors/presentations-and-… ) AES has been an early mover in the battery-based energy storage business. With distributed energy gaining prominence, this augurs well for the company. Tesla (NASDAQ: TSLA ) was in the news recently for introducing batteries to manage energy needs. However, AES already has batteries operating in big battery farms on the grid (86 MW), some projects under construction (50 MW) and other projects in the late stage of construction (210 MW). AES also recently acquired Main Street Solar, which gives AES the capabilities to enter the distributed solar market, a future growth market. Undervalued Stock AES appears to be undervalued when we look at its P/E ratio and Price-to-sales ratio relative to some of its peers. If we were to base our judgment of the company based on these two ratios alone, AES should have been a strong buy. These two ratios for the company are amongst the lowest in the industry. However, another ratio the Price-to-book (P/B) ratio is amongst the highest in the industry, indicating the company is overvalued. Price-to-book ratio is definitely a good ratio to look at, especially when looking at capital-intensive businesses like AES. The reason for the high P/B ratio is the high levels of debt that the company has. The company had a debt-to-equity ratio of close to 5, which is relatively high, in March 2015. With high debt, its interest coverage ratio at that time was a not-so-healthy 1.83. So, although this would be an area of concern for some, I believe the company has the ability to navigate safely through this. This is based on the fact that these ratios have been in a similar range for AES before and the company has a sound business plan going forward. The company appears to be well-positioned for a decent growth in the next few years, according to the company guidance. The company has estimated the following for the future – the period from 2015 to 2018 – 10-15% annual free cash flow growth – 5% average EPS growth from – 10% annual growth in dividends – 8% average annual total return Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.