Duke Energy: Quality, Value and Yield

02/16/2018 5:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

When Lynn Good took over as CEO of Duke Energy Corp. (DUK) in June 2013, the company was snared in regulatory disputes while its wholesale power business and South American assets bled cash, recalls Roger Conrad, editor of Conrad's Utility Investor.

Today, the big regulatory fights are history, and the utility has divested its risky assets. The proceeds from these sales went toward strengthening the balance sheet.

Disciplined investment in its regulated gas and utility businesses, coupled with an expanding portfolio of wind- and solar-power assets and interests in the Atlantic Coast pipeline project, will drive earnings and dividend growth in coming years.

The company appears close to reaching a settlement to clean up its coal-ash ponds without incurring a huge liability. Last month, Duke Energy inked an agreement with affected property owners that will result in the dismissal of lawsuits.

Passing through the savings from a lower corporate tax rate increases the odds that Duke Energy will recover at least most of the remaining $336 million in its current North Carolina rate case. Lower corporate taxes will also help the utility avoid passing through $513 million in costs related to Hurricane Irma to Florida ratepayers.

Duke Energy connected about 500 megawatts of solar energy in North Carolina last year, bringing its installed capacity in the Carolinas to 1,800 megawatts over the past three years and the company plans to install another 3,000 megawatts in coming years.

Meanwhile, the Atlantic Coast pipeline—a joint venture with Dominion Energy (D) and Southern Company (SO)—will deliver inexpensive natural gas from the Marcellus Shale to power plants in Virginia and the Carolinas. The project appears set to come onstream in 2019.

Duke Energy Corp finally trades below our buy target of $77, giving conservative investors an opportunity to scoop up shares of this high-quality utility. Duke Energy offers a solid value proposition, as well as a mid-single-digit yield and mid-single-digit dividend growth.

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