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Stock Strategist

Duke Deserves a Princely Valuation

The market underestimates this utility's ability to increase long-term earnings and the dividend.

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 Duke Energy (DUK) was once a darling of income investors, long trading at a premium to its peers. That premium faded with execution missteps during the 2012 Progress Energy acquisition, putting focus on Duke’s regulatory relationships in the Carolinas. Investors further soured when Duke Energy’s unregulated Latin American hydro assets and merchant generation went south, highlighting the assets’ cash flow volatility. Duke topped things off by paying the highest price/earnings multiple of any utilities M&A deal this cycle with its $6.7 billion Piedmont Natural Gas acquisition in 2016.

But CEO Lynn Good and her executive team have returned Duke Energy to its basic regulated utility business, and we think income investors should take another look. Duke’s regulatory relationships are on sound footing in the Carolinas, setting the stage for a five-year investment plan that can support 4%-6% earnings and dividend growth. We think this growth paired with a 5.0% dividend yield, narrow economic moat, and 4-star rating offers a compelling total return opportunity. The market is worried about weak near-term growth, but we think this ignores Duke’s growth in 2020 and beyond from three areas: greening up generation, meeting growing gas demand, and building out the electric grid. As Duke hits its growth objectives, we think income investors will again give it a princely valuation.

Andrew Bischof does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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