Duke Energy: High-Yield Play with Strong Balance Sheet

Aug.16.11 | About: Duke Energy (DUK)

While the recent market has been going through a roller coaster effect, Duke Energy (NYSE:DUK) ehas stayed relatively calm (not surprising with a trailing beta of 0.4). Duke Energy has the strongest balance sheet in the country, and is set to merge with Progress Energy to create the largest energy utility company in the US (Exelon (NYSE:EXC) post-Constellation merger will be roughly the same size). I believe that investing in Duke will provide a safe haven for potentially rough seas ahead, while also providing solid total annual returns.

Return to Shareholders:

Duke pays a quarterly dividend of 25 cents per share (5.44%), and has consistently paid dividends for over 24 years. With the exception of ’98, 2000, and ’01 (about 3.8%), DUK has consistently yielded over 4% annually.

Strong Balance Sheets:

DUK has a current ratio of 1.3 which provides liquidity for potential further expansion and M&A opportunities. DUK is already in the process of merging with PGN, so near-term potential M&A activity will likely be with small regional utilities. DUK has a debt to equity ratio of 78% which is exceptionally small in the utility sector where the average ratio is north of 120%. DUK also has 29.5% debt to assets. DUK is cash rich, with $1.7B of operating cash flow generated in the first 6 months of 2011.

Value Play (Metrics):

DUK currently (Q2-11) has a book value of $17.04, which gives them a P/B ratio of only 1.08. This is also a rarity in utility companies. DUK also has a 2011 estimated P/E of 13 which provides earnings stability to support the dividend.

Inflation Hedge:

Duke also provides the potential for additional nominal return through increase in the underlying stock price. As inflation rises, energy prices also rise, and utility assets become more valuable in terms of nominal dollars. Utilities have not seen the high-level buying pressure in the past few months that gold, silver, and other commodities have experienced. If the markets continue to be stormy, it is likely that institutional investors will flee to safer bets such as utility stocks. In this case, it definitely pays to be there first.

Disclosure: I am long DUK, EXC.