Duke Deserves a Princely Valuation
The market underestimates this utility's ability to increase long-term earnings and the dividend.
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 (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.