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. It is one of those slow and steady stocks that I like to own.
So let’s take a closer look at this essential service company. Is Duke Energy a good investment? Certainly, I will have some thoughts on that topic. Also, we will look at 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 4.2% Duke Energy dividend yield at the recent Duke Energy stock price.
How Often Does Duke Energy Pay Dividends?
Duke pays dividends 4 times per year. Dividends are paid in these months: March, June, September, and December.
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 objectives for the dividend. It helps me plan for my future income. Duke management doesn’t let me down in this area.
Duke Energy’s stated plans for dividend growth are 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 3-4%.
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 the dividend safety metrics in a moment. Let’s check out the revenue trend first.
Historical Revenue Trend
As a slow and steady regulated utility, Duke Energy is not a high growth stock. Revenue fluctuations are mainly due to acquisition and divestiture activity. The underlying demand for the company’s energy products grows slowly.
Demand grows in the very low single-digit percentages on an annual basis. A stable revenue base is one thing that makes utilities some of the most consistent stocks.
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 has run about 80% of earnings over the past several years.
Duke’s dividend payout ratio is high, but that is common for utility stocks. Let’s check out how the dividend compares to free cash flow.
Duke Energy Dividend Payments & 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 has required Duke 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. And, I must note that many regulated utilities operate with negative cash flow. Therefore, earnings are usually a better proxy for dividend-paying capacity.
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
At the end of last year, Duke’s debt to equity ratio was 1.2 to 1. This is not out of line with other regulated utilities.
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. Also, the investment newsletter Utility Forecaster gives Duke a low dividend safety rating. It scores Duke a 2 out of a possible 8 using its rating system.
I’m not convinced that Duke’s dividend 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 factor 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:
- Duke dividend discount model
- Duke stock price to earnings ratio
- Morningstar fair value estimate
- Utility Forecaster buy limit price
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 – 3.5%
- My desired annual return on investment – 9%
Using these assumptions, the dividend discount model puts the value of Duke Energy stock at $71 per share.
Duke Energy Stock Price To Earnings Ratio
The Duke Energy stock price to projected fiscal 2020 earnings is 18 times. This compares favorably to American Electric Power (AEP). AEP is trading at 20 times earnings.
Utility Forecaster Buy Limit Price For Duke
The Utility Forecaster investment newsletter suggests a maximum buy target of $105 per share.
Morningstar Fair Value
The investment analysis firm Morningstar believes Duke Energy stock is fairly valued at $95 per share.
Duke Energy Stock Valuation Conclusions
With the exception of the dividend discount model, each valuation measure indicates Duke Energy stock to be a reasonable value at recent prices.
Duke Energy Dividend Stock Analysis – Wrap Up
Duke is a regulated utility. Because of the consistent demand for electricity and natural gas, Duke is considered a stable and consistent stock to own.
Is Duke Energy A Good Investment?
The Duke Energy dividend yield is at an attractive level. However, the dividend appears somewhat risky. Also, the company’s debt load relative to its cash flow is a concern.
Duke holds a mid-sized position in my dividend growth stock portfolio. I plan to hold. But, I do not intend to add to the position at this time. I will consider selling if I see any further signs that the dividend may be at risk.
Further Reading About Stable Utility Stocks And Their Dividends
I hope you enjoyed this article. If so, here are a couple of others that you may find interesting:
- AEP dividend stock analysis
- Dominion dividend stock analysis
- Southern Company dividend stock analysis
- NextEra Energy, a utility stock for rapid dividend growth
- Dividends Diversify model dividend stock portfolio
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