Let’s dive into a Duke Energy dividend stock analysis today.
Duke Energy has been powering homes and businesses with electricity and natural gas for more than 150 years. Most importantly, the Duke Energy dividend is substantial.
So let’s take a closer look at this essential service company. Certainly, I will have some opinions on Duke Energy dividend growth, dividend safety, and much more.
Related: How to pick dividend stocks
Duke is one of the largest electric power holding companies in the United States. They operate as a regulated utility.
Related: What is a regulated utility
Duke’s business is focused on:
- Generating electricity
- Distributing natural gas
- Producing energy from renewable sources
Source: Duke Energy – About Us
Electricity: Their electric generating capacity is centered in the Carolinas, the Midwest, and Florida.
Natural gas distribution: They serve more than 1.6 million customers in Kentucky, Tennessee, and the Carolinas.
Commercial business: They own and operate a range of power generation assets in North America with an emphasis on renewable energy.
Here’s how the business breaks down by these components:
Company Strategic Vision & Growth Plan:
Duke is seeking to improve their customer’s experience by:
- Modernizing their energy grid
- Generating cleaner energy
- Expanding their natural gas infrastructure
The company’s long term growth will come from making smart capital investments. Their 5-year plan calls for $37 billion of growth investments.
Their 5-year plan then calls for 4-6% annual earnings growth.
Duke Energy Dividend Yield
Duke pays an annual forward dividend of $3.78 per share. This is a robust 4% Duke Energy dividend yield at the recent Duke Energy stock price.
Duke Energy Dividend Growth Rate
|1 Year||3 Years||5 Years||7 Years|
Dividend growth has settled into the 3-4% range. However, the company increased its dividend by only 1.9% in 2019.
Duke Energy Dividend Increases – Number of Years
Duke has a nice consecutive annual dividend increase streak going. Specifically, they have increased the dividend for 15 consecutive years.
Duke Energy Dividend Growth Forecast
I like it when a company is transparent in communicating its plans for the dividend. Duke management doesn’t let me down in this area.
Duke energy’s stated objective is to increase the dividend 4-6% annually through 2023. This corresponds directly with projected annual earnings growth.
Duke desires to share its profit growth in the form of dividends with investors. I like that approach. It also implies they intend to keep the dividend payout ratio steady.
But, I’m going to use a lower dividend growth forecast for my planning purposes. I will use 3%.
Read on and you will see why I’m being conservative with my forecast. The dividend metrics show some risk as it relates to dividend safety.
Besides, the 2019 dividend increase was below the recent trend. And, below management’s forecast for 4-6% dividend growth.
We will look at these dividend safety metrics in a moment. Let’s check out the revenue trend first.
Historical Revenue Trend
As a stodgy regulated utility, Duke Energy is not a high growth story. Revenue fluctuations are mainly due to acquisition and divestiture activity.
The underlying demand for the company’s energy products grows slowly in the very low single-digit percentages on an annual basis.
Duke Energy Dividend Payout Ratio – Based On Earnings
Duke’s earnings grow over time. However, they can be volatile. This is due to mergers and acquisitions related costs. And, regulatory rate settlements.
The company prefers to discuss “adjusted earnings per share” with investors. Management makes adjustments to earnings that factor out certain items from earnings reported under the accounting rules.
But in the long run, Duke’s earnings grow from acquisitions. And they grow by investing in capital improvement projects.
The cost of capital projects plus a profit margin is then passed on to their customers. This is the essence of a regulated utility business model.
The dividend payout ratio based on earnings is pretty high. It is running about 95% of earnings over the past 2 years.
This ratio doesn’t give me a lot of confidence in Duke Energy’s dividend safety. So, let’s check out how the dividend compares to free cash flow.
Duke Energy Free Cash Flow
Judging from the graph above, the dividend is not covered by free cash flow generation.
Free cash flow has been negative for the last 3 years. This doesn’t make me feel any better about dividend safety.
This situation requires the company to fund both the dividend and some of its capital projects with debt. And, by issuing more shares of stock to the public.
Additional shares dilute my ownership interest. Additional debt increases financial and investment risk. Higher debt levels also reduce dividend safety since the company becomes more leveraged.
These risks are mitigated somewhat by the predictable profits of their business.
Before I conclude on dividend safety, let’s check out the company’s financial position.
Duke Energy Credit Rating
Knowing a company’s credit rating is important. It provides a signal about the company’s financial position.
A corporation’s credit rating is similar to how your credit score works.
Higher credit ratings mean lower risk to those who lend the company money. Also, higher ratings mean lenders will likely get their loans paid back.
Duke has a BBB+ investment grade-moderate credit risk rating from S&P.
This is an adequate rating. It is, however, at the lower end of the investment-grade spectrum as shown in the chart above.
Duke Energy Debt To Equity Ratio
Here is the debt to equity ratio from the recent past:
- 12/31/17 – 1.28 to 1
- 12/31/18 – 1.30 to 1
- 6/30/19 – 1.34 to 1
Knowing what we have learned so far, it’s no surprise that debt to equity is on the rise.
Duke Energy Dividend Safety
I will make a judgment on dividend safety based on several factors presented thus far:
- Business model and growth plan
- Dividend payout ratio based on earnings
- Dividend payout ratio based on free cash flow
- Credit rating
- Debt to equity
Based on most of these metrics, the Duke Energy dividend is fairly risky, in my opinion.
I’m not saying it will be reduced in the future. I don’t know that for a fact.
But, the Duke Energy dividend certainly does not get high marks for safety. The one mitigating fator Duke has is the predictability of its business given its status as a regulated utility.
Duke Energy Stock Valuation
Let’s judge value in several ways:
- Dividend discount model
- Price to earnings ratio
- Morningstar fair value estimate
Duke Energy Dividend Discount Model
The single-stage dividend discount model considers several factors I have discussed thus far.
- Current dividend payment – $3.78 per share
- Projected dividend growth rate – 3%
- My desired annual return on investment – 9%
Using these assumptions, the dividend discount model puts the value of Duke Energy stock at $65 per share.
Duke Energy Stock Price To Earnings Ratio
The Duke Energy stock price to projected fiscal 2019 earnings is 24 times. To compare, the S&P 500 forward price to earnings ratio for 2019 is 18 times.
Looking at a couple of the other utility stocks, Dominion trades at 21 times forward earnings. And AEP trades at 22 times.
Duke Energy’s stock is expensive on a price to earnings basis relative to the market as a whole. And, to its peers.
High-quality stocks usually come at premium prices. But I’m not sure I would classify Duke Energy stock as high quality at this point.
Morningstar Fair Value
The investment analysis firm Morningstar believes Duke Energy stock is fairly valued at $88 per share.
Duke Energy Stock Valuation Conclusions
Every valuation measure indicates Duke Energy stock is overvalued at recent prices.
Duke Energy Dividend Stock Analysis – Wrap Up
Duke is a regulated utility. It benefits from a consistent demand for electricity and natural gas.
The Duke Energy dividend yield is at an attractive level. However, the dividend appears quite risky and the stock is appears overvalued.
Duke holds a mid-sized position in my dividend growth stock portfolio. I do not intend to add to that position. I will consider selling if I see any further signs that the dividend may not be safe from a future reduction.
Related Articles You Might Enjoy
I hope you enjoyed this article. If so, here are a couple of others that you may find interesting:
Disclosure & Disclaimer
This article, or any of the articles referenced here, is not intended to be investment advice specific to your situation. I am not a licensed investment adviser, and I am not providing you with individual investment advice. The only purpose of this site is information & entertainment. We are not liable for any losses suffered by any party because of information published on this blog. See this site’s Disclaimer and Privacy tab for more information.