Duke Energy: Going Ex-Dividend But Overvalued

| About: Duke Energy (DUK)


The Company Recently Declared A Dividend Which Will Be Paid In March.

The discounted dividend model shows the stock should be worth around $44 which provides 44% downside from today's price of $78.56.

I haven't bought any shares in the name since I initiated my position back in December.

A dividend is just one of many ways a company can reward its shareholders by paying them out in cash. The investor can then choose to take the cash and run, reinvest it in the company, or invest it in a different company. After a company has made their net income for the quarter they have the choice of what to do with it and the choices are usually to either plow the money back into the business for other investments or pay some of that money back to the shareholders in the form of a dividend.

Most Recent Dividend Announcement

Duke Energy Corporation (NYSE:DUK) recently announced a quarterly dividend of $0.825 per share with an ex-dividend which was on February 10th, making the must own date February 9th. The dividend is going to be payable to owners of the shares on March 16th. The dividend is currently good for a 4.2% yield on today's share price of $78.56. Based on trailing earnings, the dividend is good for a payout ratio of 92% which is pretty high. From a cash flow perspective the company has paid $2.3 billion in dividends over the past twelve months on free cash flow of $544 million which is good for a 422% cash flow payout ratio.

Potential Future Dividends

The company has been increasing its dividend for the past 11 years with a five-year dividend growth rate of 2.2%. Over the past five years the company has been increasing its dividend during the month of August and it wouldn't surprise me if it did the same thing in 2016.

The company is projected to earn $4.67 per share in earnings for next year and if the EPS payout ratio remains the same at 92% then the company should distribute about $4.30 annually starting August (or a 30% increase). That amount seems pretty aggressive and I don't believe the 92% payout ratio is sustainable for the long-term.

Earnings growth projections for the company are pretty decent for a utility with a one year growth rate of 2.17% and five year growth rate of 3.2%. With that said, a 2% increase to the dividend would be much more prudent than 30%. A 2% increase would constitute an annual dividend of $3.36 for 2016 if it goes ex-dividend in August.

Dividend Valuation

Now let's get to the meat and potatoes, the dividend valuation model to determine a price that the stock should be at based on the dividend alone. Since I just mentioned that the company has been increasing its dividend for the past 11 years we know that it has a pretty good history of increasing it and should continue to increase it going into the future. The dividend growth model equation takes the form of:

Annual Dividend [D]

Rate of Return [R] - Dividend Growth rate [G]

Where D is equivalent to the current dividend, R is the rate of return desired by the investor, and G is the anticipated growth rate of the dividend. For the D value I'm going to use the existing dividend rate of $3.30.

For the R value I'm going to look at the average return of the Utilities Select Sector SPDR ETF (NYSEARCA:XLU) over the past five years because Duke accounts for nearly 8.77% of the ETF. I do this because I like to take a look at the industry average as a whole as opposed to the specific stock because it averages out the good with the bad over the long haul. The average annual return on the XLU has been 9.5% which is the number I'm going to use for the R value.

For the G value of the equation I'm going to use a dividend growth rate of 2% because I definitely believe the company could increase the dividend by that much at least for the next year to keep investors happy. When you plug and chug all the numbers you get a stock value of $44 which makes the stock overvalued by about 44% from today's price of $78.56. For reference, the 52-week high on the stock was $87.18 around this time last year.


The dividend discount model is just one of many ways to value a company and should be taken into consideration while trying to evaluate a company. Assumptions are always made while using valuation models and I believe I've selected some of the most conservative criteria for the valuation in this article. This valuation model shows the value of the dividend stream and that the stock is overvalued based on the dividend alone. The company has been around for quite some time and can definitely afford to increase the dividend when August 2016 comes around.

The stock will definitely go higher in the near-term due to the market volatility mainly because people want guaranteed yield. You can't find a 4% yield anywhere these days other than in utility stocks like Duke.

The stock has shot up since early December and the company currently trades at a trailing 12-month P/E ratio of 22.71, 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 16.84 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (10.47), 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 2.17%.

Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. 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: I am/we are long DUK.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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