By Ahmed Ishtiaq
Duke Energy (NYSE:DUK) is the largest electric power holding company in the United States. The company serves electric and gas customers in the South and Midwest. Its US Franchised Electric and Gas unit operates primarily through its Duke Energy Carolinas, Duke Energy Ohio, Duke Energy Indiana and Duke Energy Kentucky regional businesses. The company has 58,200 MW of electric generating capacity, 32,000 miles of transmission lines, and 250,200 miles of distribution lines. It also has commercial and international power assets. While it is focused on energy operations, Duke also has some limited insurance, real estate, and telecom assets.
In a major expansion in 2012, Duke acquired Progress Energy in a $32 billion deal. In addition, the company has more than 4,300 megawatts of electric generation in Latin America. Duke operates eight hydroelectric power plants in Brazil with an installed capacity of 2,307 megawatts. Furthermore, almost all of its Midwest generation comes from coal, natural gas, or oil, while half of its Carolinas generation comes from its nuclear power plants.
Duke is one of the highest yielding utility stocks in the market. At the moment, the company pays an annual dividend of $3.06 per share, yielding 4.60%. Normally utilities tend to have high dividend yields, and these companies are some of the best dividend payers out there. Massive size, strong operations, stable revenues and healthy cash flows allow these companies to pay attractive dividends. However, due to heavy capital expenditures, payout ratio based on free cash flows is negative for the company.
Duke energy is generating less cash and spending more in capital expenditures. Over the past twelve months, the company has spent $5.2 billion in capital expenditures and paid $1.56 billion in cash dividends. On the other hand, free cash flows for Duke stood at negative $603 million for the trailing twelve months.
Renewable Energy Assets Driving Future Growth
Duke Energy Renewables is part of Duke Energy's Commercial Businesses. The segment develops wind and solar energy projects for customers throughout the country. Duke Energy is growing its portfolio of commercial renewable assets. At the moment, the portfolio includes 15 wind farms and 14 solar farms in operation in nine states. Duke has the capacity to generate more than 1,700 megawatts through its renewable energy assets. Recently, the company announced its biggest windpower project, Los Vientos I and II in south Texas.
The project has added the capacity of 402 megawatts ((NYSE:MW)) to its growing portfolio of renewable energy assets. All of the output from the Los Vientos I Windpower Project will be sold to CPS Energy under a 25-year agreement. In addition, all the output from the Los Vientos II Windpower Project will be sold to Austin Energy. Renewable energy assets will continue to drive growth for the company. It will also reduce the pressure on the company from environmental groups. Environmental activists can give the company some tough times due to its nuclear energy assets.
Comparison with Peers
Debt to Equity
After the recent acquisition, Duke Energy became the biggest energy company in the U.S. based on the market capitalization. At the moment, the company has a market capitalization of $47 billion. Duke is currently trading at a premium compared to its peers. However, the company demonstrates the strongest EPS growth figures in the group. Furthermore, Duke has the second best margins behind Southern Company. Exelon has a divided yield of 6.9%, and the company pays an annual dividend of $2.92. Exelon dividends have been quite constant over the previous four years, with one dividend split during the second quarter of 2012. Southern Company is also paying a healthy annual dividend of $1.96 with a dividend yield of 4.50%.
Utility stocks provide a great opportunity for income investors to collect cash and have a constant stream of income. Duke Energy has an attractive dividend yield, which plays an important role in attracting investors to the company. Furthermore, renewable energy assets will provide some solid growth in the future. I believe Duke Energy can be a great investment for income investors with substantial growth potential.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.