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.