Duke Energy: Steady Income With Safety Net Of Regulated Business

| About: Duke Energy (DUK)

Summary

Duke Energy Corp. total return outperformed the DOW average for the 39 month test period by 4.89% which will keep you a bit ahead of the market.

Duke Energy Corp. dividend is above average at 4.1% making the company an income portfolio choice.

Duke Energy Corp. CAGR of 4% is a bit low but is steady and will keep you even with inflation.

This article is about Duke Energy Corp. (NYSE:DUK) and why it's an income investment that's being considered for The Good Business Portfolio. Duke Energy Corp. is an energy company and runs its operations in three business segments: Regulated Utilities, International Energy and Commercial Power. The Good Business Portfolio Guidelines, Total Return, Last Quarter's Earnings, Company Business and Takeaways and Recent Portfolio Changes will be looked at.

Good Business Portfolio Guidelines

Duke Energy Corp. passes 8 of 10 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. For a complete set of the guidelines, please see my article "The Good Business Portfolio: All 24 Positions." These guidelines provide me with a balanced portfolio of income, defensive, momentum, and growing companies that keeps me ahead of the Dow average.

Duke Energy Corp. is a large-cap company with a capitalization of $54.9 billion. Duke Energy Corp. is not standing still as the war on coal continues, they are increasing there natural gas production and reducing coal use to be more efficient. They are also adding 600 Million watts of solar and wind energy per year. The large size of Duke Energy Corp. gives it the muscle to get loans and issue shares to easily raise capital to buy new companies.

Duke Energy Corp. has a dividend yield of 4.1% which is above average for the market. The dividend has been increased for 9 years out of the last ten years and its dividend is very safe. Duke Energy Corp. is therefore a good choice for the dividend income investor. The average payout ratio is very high at 81% over the past five years. After paying the dividend this leaves some cash remaining for investment in new company purchases and wind and solar plant expansion.

Duke Energy Corp. cash flow is good at $4.72 Billion which leaves enough cash after paying its high dividend for normal business expansion, but would require additional financing in the case of buying a company like Piedmont Gas. In early March they issued 9,250,000 shares at $74.28 to help finance the Piedmont buy.

I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.2% of the portfolio as income and I need 1.8% capital gain in addition for a yearly distribution of 5%. Duke Energy Corp. has a three-year CAGR of 4% just missing my overall requirement. Looking back five years $10,000 invested five years ago would now be worth $18,900 today ( from S&P Capital IQ). This makes Duke Energy Corp. a good investment for the income investor with the above average dividend and steady moderate growth to keep you even with inflation.

Duke Energy Corp. S&P Capital IQ has a three-star rating or hold with a price target of $75.00. This makes Duke Energy Corp. fairly priced at present. In the long term Duke Energy Corp. is a slow growth sleep at night regulated energy supply company.

Total Return and Yearly Dividend

The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of The Good Business Portfolio. Duke Energy Corp. had better total return than the Dow baseline in my 39 month test period. I chose the 39 month test period (starting January 1, 2013) because it includes the great year of 2013, the moderate year of 2014, the small loss year of 2015 and the even year of 2016 YTD to see how the company does in good and bad markets. I have had comments about why I do not compare the total return to the S&P 500 average. I use the Dow average because the Good Business Portfolio has six Dow companies in it and is weighted more to the Dow average than the S&P 500. Modeling the Dow average is not an objective of the portfolio but just happened by using the 10 guidelines as a filter for company selection. This good total return for Duke Energy Corp. makes it appropriate for the income investor that also wants fair growth to keep even with inflation. The dividend is high at 4.1% and has been increased 9 of the last ten years.

DOW's 39 month total return baseline is 33.67%

Company Name

39 Month total return

Difference from DOW baseline

Yearly Dividend percentage

Duke Energy Corp.

38.59%

+4.92%

4.1%

Click to enlarge

Last Quarter's Earnings

For the last quarter Duke Energy Corp. reported earnings on February 18, 2016 that missed expected at $0.87 compared to last year at $0.86 and expected at $0.94. Revenue decreased at a 2.0% rate or $23.46 Billion total revenue. This was a fair report showing the result of the weather. Earnings for the next quarter will be released in mid May and are expected to be at $1.17 compared to the last year at $1.24. The earnings normally continue to grow each quarter at a slow 4%/year pace as the company reduces expenses using Gas and the adding of new assets. Management guided 2016 earnings at $4.50 - $4.70/share.

Business Overview

Duke Energy Corp. is an energy company. Duke Energy conducts its operations in three business segments: Regulated Utilities, International Energy and Commercial Power. The Company's Regulated Utilities segment conducts operations primarily through Duke Energy Carolinas, Duke Energy Progress, Duke Energy Florida, Duke Energy Indiana and Duke Energy Ohio. The Company's International Energy segment principally operates and manages power generation facilities and engages in sales and marketing of electric power, natural gas, and natural gas liquids outside the United States. The Company's Commercial Power builds, develops and operates wind and solar renewable generation and energy transmission projects throughout the continental United States. Duke Energy operates in the United States and Latin America primarily through its direct and indirect subsidiaries. What I like about DUK is the management being pro-active in building the business. First they are moving to gas from coal as the war on coal continues. In early March they issued 9,250,000 shares at $74.28 to help finance the Piedmont gas buy. They are also each year adding more to their solar and wind capacity to increase the renewable sector. Last year they added 600 Million watts of new renewable energy.

Takeaways and Recent Portfolio Changes

The Duke Energy Corp. is a good income choice considering its total return over performing the Dow average and high dividend, but has a 4% CAGR going forward, a little below my requirements. The good Business Portfolio will wait for a better business opportunity but will keep DUK on its watch list. If you don't already have a position in the energy business Duke Energy Corp. may be worth a position for your income segment of your portfolio.

Sold some covered calls on Cabela's (NYSE:CAB) for income while we wait for the takeover and the next earnings report. Sold April 50's at $1.68, and will buy them back if the premium drops to $0.32. Bought the calls back at $0.28 for a contract gain of $1.40/share, taking 80% of the premium allows another trade in the same month if CAB suddenly goes up in the same month.

Sold position in Hanes Brands (NYSE:HBI) , The last earnings report was not good and the market action did not show strength. There is now a slot open for a new company to be added to The Good Business Portfolio.

Bought Some more Omega Health Investors (NYSE:OHI) , now at 3.2% of The Good Business Portfolio. I intend to keep adding to OHI until its 4% of the portfolio a full position and watch it grow. The dividends are being reinvested in shares of OHI.

The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Home Depot (NYSE:HD) is 8.3% of portfolio, Johnson and Johnson (NYSE:JNJ) is 8.4% of the portfolio, Altria Group Inc.(NYSE:MO) is 7.4% of the portfolio, Boeing (NYSE:BA) is 8.0% of the Portfolio and L Brands (NYSE:LB) is 6.9% of the portfolio, therefore HD, BA and JNJ are now in trim position with Altria Group Inc., L Brands Inc. getting close. Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the last quarter earnings call.

For the total Good Business Portfolio see my recent article on 2015 fourth-quarter performance for the complete portfolio list and performance. Become a follower and you will get each quarters performance after the earnings season is over.

I have written individual articles on CAB, JNJ, EOS, LB, GE, IR, MO, BA, Omega Health Investors and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.

Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.

Disclosure: I am/we are long BA, HD, JNJ, LB, MO, OHI, CAB.

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.