Duke Energy (DUK) and Southern Company (SO) both make for good long term investments, especially since they have both pulled back nicely from their 52-week highs. They also both offer good yields of 4.7% (Duke Energy) and 4.3% (Southern Company) respectively, which make them rather attractive in this low interest rate environment. We are going to examine each of the plays individually and provide a list of reasons as to why we think they make for good long-term investments.
Duke Energy's recently completed merger with Progress Energy, Inc, is expected to be a good fit and will enable it to maintain its long-term goal of 4.5%-6% earnings growth. The merger will also increase its ability to build new power plants that are designed to meet future green house emission requirements.
The combined assets of the two companies make it the largest U.S. utility providing services to more than 7.1 million customers.
Reasons to be bullish on Duke Energy:
- A good yield of 4.7%
- The dividend was increased from 0.25 to 0.255 per share. With the reverse split this works out to $3.06 per year
- It has a strong balance sheet in comparison with most of its peers. At the end of the 1st quarter it had $1.1 billion in cash and cash equivalents in comparison to 2.1 billion at the end of 2011
- Operating cash flow of $3.96 billion
- It is in a joint venture program with American Electric Power (AEP) to develop a 240 mile, 765-KV transmission line in Indiana which is expected to be completed and be fully operational in 2014
- A 5 year dividend average of 5.2%
- Net income increased from $1.07 billion in 2009 to $1.7 billion in 2011
- Profit margins of 10%
- It has a low beta of 0.31 which indicates that in general it's not a very volatile stock
- Cash flow increased from $2.68 in 2009 to $2.98 in 2011
- Annual EPS before NRI increased from $1.25 in 2007 to $1.46 in 2011
- A decent interest coverage ratio of 3.5
- A projected 3-5 year EPS growth rate of 4.3%
- 5 year sales growth rate of 2.05%
- A good free cash flow yield of 4.89%
- Operating margins of 22.4% and profit margins of 10.5%
- A quarterly earnings growth rate of 2.10%
- $100K invested 10 years ago would have grown to $157K. If the dividends were reinvested the rate of return would have been much higher.
Charts and data of interest for Duke Energy
Southern Company has increased its dividends consecutively for 11 years and has been paying dividends since 1948. It is one of the largest electric and best managed utility companies in the United States. Southern Company's rate of returns is among the highest in the industry, and it is also a leader in power plant productivity, cost control and new technology research.
Reasons to be bullish on Southern Company:
- A good yield of 4.3%
- A 5 year dividend average of 4.6%
- It continues to generate returns that are among the highest in the industry, while maintaining its position as low cost provider of electricity
- A strong relative strength score of 81 out of a possible 100. Relative strength refers to a stock's price change over a period of time relative to that of market index such as the S&P 500. Scores are assigned on a scale of 1 to 100, with 100 being the top score
- Management expects to invest $14 billion between 2012 and 2014. The bulk of this capital will be invested in transmission, distribution and generation facilities and this is expected to boost earnings growth through an increase in efficiency and production
- Operating margins of 24% and profit margins of 12.8%
- A positive quarterly earnings growth rate of 3.10%
- Operating cash flow of $5.27 billion
- It is one of the largest electric utility companies in the United States and the top energy firm servicing the Southeast market.
- Five-year sales growth rate of 2.61%
- Annual EPS before NRI rose from $2.24 in 2007 to $2.57 in 2011.
- A five year dividend growth rate of 3.7%
- A manageable payout ratio of 77%
- Cash flow increased from $4.62 in 2009 to $5.01 in 2011
- Net income rose from $1.7 billion to $2.2 billion in 2011
- EPS vs quarter 1 year ago of 3.2%
- A 3-5 year estimated EPS growth rate of 5.04%
- It has consecutively increased its dividend for 11 years in a row.
- Projected year-over-year growth rate of 3.00% and 6.5% in 2012 and 2013 respectively
- A decent interest coverage rate of 4.50
- $100K invested 10 years ago would have grown to $212K. If the dividend were invested the rate of return would be higher
Charts and data of Interest for Southern Company
In general, the stock tends to perform much better when it is trading above the EPS line as indicated in the above chart.
We like both companies from a long term perspective, however if we had to choose we would favor Southern Company over Duke Energy for the following reasons.
- It has consecutively increased its dividend for 11 years
- It is one of the best managed utility companies in the United States and its rate of return is among the highest in the industry.
- It is a leader in power plant productivity, cost control and new technology research
- It has a lower payout ratio of 77%, versus 89% for Duke
- The stock is stronger in terms of relative strength. Additionally, $100K invested 10 years ago would have grown to $212K, versus $157K for Duke.
However, if you have the money to invest in both companies, then it would not be a bad idea to allocate some money to Duke Energy also.
EPS consensus estimates and EPS surprise charts and some of the Research and historical data used in this article was obtained from Zacks.com. Earnings estimates sourced from dailyfinance.com.
It is imperative that you do your due diligence and then determine if the above play/plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.