Two Favorites in Utilities: Duke and NextEra

07/08/2020 5:00 am EST

Focus: UTILITIES

Richard Moroney

Editor, Dow Theory Forecasts

In a year full of surprises, we recommend that investors be selective with their utility selections; some of our favorite picks in the sector are reviewed below, notes Richard Moroney, editor of Dow Theory Forecasts, one of the financial industry's longest running advisory services — first published in 1946.

Duke Energy (DUK) has paid a quarterly dividend in 94 consecutive years, increasing its distribution 12 straight years. Its long term strategy involves growing its dividend at the same pace as earnings.

The dividend currently consumes 76% of Duke’s profits, versus management’s targeted payout ratio of 65% to 75%. The stock yields 4.7%, above the average of 3.6% for utilities in the S&P 1500 Index.

The consensus calls for both per share profits and sales to rise 2% this year, followed by profit growth of 6% in 2021 on 4% higher revenue. The 2020 consensus profit estimate of $5.14 per share remains below the midpoint of management’s guidance of $5.25, reaffirmed in May.

Duke trades at 16 times the 2020 consensus profit estimate, below its sector median of 17. Scoring above 80 for both sector-specific scores, Duke is a member of our Top 15 Utilities Portfolio.

NextEra Energy (NEE) forecasts both per-share profits and operating cash flow climbing at an annual clip of 6% to 8% through 2022. For 2020, NextEra targets earnings per share of $8.70 to $9.20; although the consensus profit estimate has edged higher, it still leaves room for upside at $9.09 per share.

NextEra yields 2.3%, below the S&P 1500 utility stock’s average yield of 3.6%. But just two of the index’s 49 utility stocks have grown their dividend faster than NextEra’s five year annualized rate of 12%.

NextEra has raised its dividend in 24 straight years, including annual growth of 13% in each of the past four years. Management targets 10% dividend growth through at least 2022. NextEra is a member of our Top 15 Utilities Portfolio.

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