High Yielding Duke Energy Provides A Good Entry Point Right Now

Aug.15.14 | About: Duke Energy (DUK)

Summary

The stock price is fairly valued on 2014 guidance and on 2015 earnings estimates.

I calculate the risk/reward ratio to be a bit favorable right now.

The company announced earnings last week which beat Street estimates and the company raised full year guidance; an excellent recipe for a stock price increase.

The last time I wrote about Duke Energy (NYSE:DUK) I stated, "Due to the tiring high dividend payout ratio, low earnings growth potential, and deteriorating financial efficiency ratios, I'm not going to be pulling the trigger right now." Since the article was published the stock has increased 2.56% versus the 2.85% gain the S&P 500 (NYSEARCA:SPY) posted. Duke Energy Corp is an energy company, operating through its direct and indirect wholly owned subsidiaries.

On August 7, 2014, the company reported second quarter earnings of $1.11 per share, which beat the consensus of analysts' estimates by $0.13. In the past year, the company's stock is up 1.85% excluding dividends (up 6.25% including dividends) and is losing to the S&P 500, which has gained 15.58% in the same time frame. Since initiating my position back on May 28, 2013, I'm up 3.05% inclusive of reinvested dividends and dollar cost averaging. With all this in mind, I'd like to take a moment to evaluate the stock to see if right now is a good time to purchase more for the utilities sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 26.5, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 15.14 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (6.48), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is expensively priced based on a 1-year EPS growth rate of 4.09%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

15Aug13

69.02

24.56

15.14

4.56

68

4.42

2.19

06Oct13

66.43

23.73

14.58

4.56

68

4.21

5.63

07Nov13

72.92

26.04

16.01

4.56

68

4.44

5.86

23Feb14

71.49

21.28

15.06

4.75

71

5.08

4.19

26May14

70.28

25.84

14.78

4.76

71

6.93

3.73

14Aug14

72.08

26.5

15.14

4.76

71

6.48

4.09

Click to enlarge

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 4.33% with a payout ratio of 115% of trailing 12-month earnings while sporting return on assets, equity and investment values of 1.7%, 4.7% and 4.5%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 4.33% yield of this company is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 10 years at a 5-year dividend growth rate of 2.7%. Below is a comparison table of the financial metrics for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

15Aug13

4.52

92

2.1

5.8

3.0

06Oct13

4.70

111

1.8

4.9

3.0

07Nov13

4.28

111

1.8

4.9

3.0

23Feb14

4.36

93

2.1

5.9

3.0

26May14

4.44

115

1.7

4.7

4.5

14Aug14

4.33

115

1.7

4.7

4.5

Click to enlarge

Technicals

Click to enlarge

Looking first at the relative strength index chart [RSI] at the top, I see the stock in middle-ground territory with a current value of 54.27. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is below the red line with the divergence bars increasing in height indicating bullish momentum. As for the stock price itself ($72.08), I'm looking at $73.31 to act as resistance and $71.67 to act as support for a risk/reward ratio which plays out to be -0.57% to 1.71%.

The Stock Is On Fire This Past Week

During the past week the stock has increased 2.1% versus the S&P500 which has gained 2.37%. Yes, the stock is on fire because the fact it's a utility and it is matching the broader market. The reason for this run-up in the stock is because the company reported earnings last week which beat expectations and they raised full-year guidance. Earnings increased 80% from this time last year in large part to higher revenues from its rate regulated utilities. The international segment of the business benefited from reorganizing operations in Chile which helped realize a tax benefit. The earnings guidance was increased from $4.45 to $4.60 to a new range of $4.50 to $4.65. Despite the increase in earnings guidance I believe the stock to be fairly valued based on the low point of the range.

Conclusion

The company had a pretty good quarterly earnings report last week and it moved up on the announcement. With all the uncertainty of geopolitical tensions I believe this company should be insulated from what's going on in Europe and Asia. Fundamentally, I believe the stock to be fairly valued on next year's earnings estimates but expensively valued on earnings growth potential. Financially, the dividend is pretty big, and doesn't have much room to grow. On a technical basis the risk/reward ratio shows me a bit more reward right now. I won't be buying any shares right now but will keep it on the radar in case it comes down again.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: The author is long DUK, SPY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.