Duke Energy: A Top Pick for Income

12/15/2015 8:00 am EST


Ari Charney

Analyst and Associate Editor, Canadian Edge and Personal Finance

It’s no fun enduring a sell-off. But the latest Fed-fueled decline in utility stocks gives us an opportunity to buy some long time favorites, suggests Ari Charney, editor of Utility Forecaster.

For example, long time Growth Portfolio core holding Duke Energy Corp. (DUK) is now at its lowest price in about two years. Meanwhile, the shares allow long-term investors to lock in an attractive yield near 5%.

Of course, the utility giant has fallen somewhat harder than its peers because it’s made a rich bid to acquire Piedmont Natural Gas Co. (PNY), a holding in our aggressive Income Portfolio.

Though we’ve been arguing that natural gas utilities control some of the most valuable assets of our nation’s energy infrastructure, we can certainly understand why the market took a dim view of the 42.1% premium Duke is paying to get a piece of the action. But we think Duke will ultimately get its money’s worth.

From a strategic standpoint, the deal makes a lot of sense. Piedmont distributes natural gas to more than 1 million mostly residential customers in parts of North Carolina, South Carolina, and Tennessee.

So Duke is getting a regulated gas distributor whose service territory largely overlaps with its electric territory. Equally important, Piedmont enjoys strong authorized returns on equity of around 10% on a $2.3 billion rate base.

And Duke says the deal gives it a gas infrastructure platform that could lead to future growth opportunities beyond its existing markets. 

In the interim, Duke sees Piedmont’s strong growth as helping the firm meet its long-term target of 4% to 6% annual earnings growth. Duke is one our top picks and a buy below $75.

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