With its sector-leading margins, this US power generator merits attention after recent shares weakness.
Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.
Two factors will work in favour of power generators in the United States: the continuing, if slightly sluggish, growth of the economy generally and the drive to reduce pollution in big cities through the switch to electric-powered vehicles. One power company worth revisiting is Duke Energy (NYSE:DUK).
It was founded more than 100 years ago and has grown into the largest electricity utility in the US, with 7.6 million electricity customers across the southeast and Midwest. It also has assets in Canada.
Regulated electricity still accounts for nearly nine-tenths of Duke's revenue, but its gas business is growing rapidly and now has 1.6 million customers. There is also a small renewable energy portfolio.
The group is highly profitable, with better operating margins than others in the sector in the US. The most recent quarterly results, covering the third quarter of 2019, showed revenue up 4.7% year-on-year while net income leapt 24% as net profit margins improved substantially. Its next results are due in mid-February.
One problem that has been hanging over Duke is the cost of cleaning up nine coal ash basins in North Carolina. Coal ash is the waste that is left after coal is burned. It comprises fine particles that can be carried in the air and can cause a health hazard as well as coarse material.
An agreement with state regulators and community groups signed this month involves closing the basins and transferring 80 million tons of ash to lined landfills but it does reduce the expected cost of up to $10 billion by $1.5 billion. Duke has already spent about $2.4 billion of this and the rest will be spread over 15-20 years, which is manageable.
I tipped the shares last May when they stood at $88, suggesting that they were worth buying below $90, with the downside limited to $83. In fact, the floor has moved up to $85.50 and the stock has been as high as $97, although it now stands at around $91.
The price earnings ratio is actually less demanding at 18.9 than it was in May and the yield is only slightly lower at 4.2%, still pretty good for such a solid investment and well above the industry average of 2.9%.
I pointed out that the group has a consistent record of paying quarterly dividends and it has raised the pay-out in each of the past 14 years, mostly by about 2%. In July 2018 it upped the rate of increase to 4%, more in line with earnings growth.
There was a fair chance that this level of increase would continue for the foreseeable future but, disappointingly, this has not proved to be the case. The 2019 increase, taking effect in September, was 1.75 cents, up 1.85%, taking the quarterly figure to 94.5 cents. I expect a higher percentage increase to be announced this summer.
Duke faces heavy capital investment in expansion and infrastructure, splashing out $37 billion over the next four years but with cash flow running at about $7 billion a year that is not a problem and it should mean earnings rising by up to 6% a year.
The shares have considerably underperformed two sector rivals, Dominion Energy (NYSE:D) and Southern Co (NYSE:SO), over the past 12 months with the gap widening noticeably over the past three months. This seems quite unjustified and it suggests that Duke is currently offering the best value at the moment.
Hobson’s choice: It wouldn’t be wrong to hold off and hope there will be another chance to buy below $90 but that opportunity may not arise. The stock is now worth buying up to $93.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.
Please note that our article on this investment should not be considered to be a regular publication.
Details of all recommendations issued by ii during the previous 12-month period can be found here.
ii adheres to a strict code of conduct. Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.
In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.