Utilities company Duke Energy (NYSE:DUK) is known for its solid dividend yield of 4.30%, and the stock's performance on the market so far this year has been strong as well. Duke shares are up around 5.5% in 2014, almost at par with the S&P 500's performance, and close to their 52-week high. The company's last two quarterly reports have been robust, with Duke exceeding analysts' estimates on earnings. But, will Duke be able to sustain its terrific performance going forward? Let's find out.
A focused approach is driving results
Duke Energy is focused on delivering affordable and reliable services to its customers. It is leveraging its competitive advantage, including additional capabilities acquired through the merger with Progress Energy in 2012. It is focusing on delivering attractive returns to investors through long-term earnings growth, as well as dividends.
Management expects to complete its comprehensive longer-term strategies for all of its 69 ash basins across all regions by the year-end. Duke's plans, including the cost structure, will get updated and refined as engineering plans are completed. Its coal facilities have allowed it to serve customers with affordable and reliable power. Now, it is striving to deliver careful, environment-friendly, and cost-effective solutions.
The company is coming off a strong quarter on the back of all-time peak demand at Duke Energy Carolinas, and a new winter peak demand at Duke Energy Progress in January. Duke Energy's Midwest utilities in Indiana, Ohio, and Kentucky also set new winter peaks during the quarter. The extreme weather conditions, along with fuel price volatility highlighted Duke's capabilities for its Carolina customers. The company's solid execution allowed it to meet demand without much problem.
The company is continuously focused on making its operations more efficient. Till date, it has placed six of the eight transmission expansion projects in service to eliminate FERC market power concerns. These projects were committed to be placed in service over time by July 1, 2015. The remaining two projects are estimated to be delivered later this month. So, Duke is progressing ahead of schedule, and this could accelerate earnings growth going forward.
The company has validated major technology systems, and management has continued to focus on final performance testing and optimization, within the total revised project estimate of $3.5 billion. Hence, Duke has executed well to stay within the projected costs.
In addition, Duke Energy is exiting a few businesses, including 6,100 megawatts of coal and gas capacity serving the PJM wholesale markets, as well as Duke Energy Retail. These Midwest generation assets are not a strategic fit for Duke, due to the price volatility in this market. Hence, Duke is making a smart move by disposing off assets that are not central to its long-term growth prospects.
Duke's international business, which includes 4,600 megawatts of generation in Latin America, about half of which comprises of hydro generation in Brazil, is also progressing strongly. This business contributes between 10% and 15% of Duke Energy's earnings mix, and has been a solid performer till date. Thermal generation units are being used to preserve reservoir levels and meet customer demand.
Also, Duke Energy has strategically reduced its targeted 2014 contracted percentage for its hydro generation in expectation of low reservoir levels and high electric demand. This strategy has helped it maintain strong results by giving it the opportunity to sell power into attractive spot markets.
In addition, Duke Energy is conducting a strategic review of the international business. It's evaluating growth opportunities, including potential tax-effective strategies, for domestic use of offshore cash, with an internal timeline to complete this review by late 2014 or early 2015.
Investments to drive future growth
Duke Energy is aggressively investing in growth opportunities. It's continuously and actively pursuing a number of projects that are expected to support its 4% to 6% earnings per share growth rate, including new generation, infrastructure projects, and environmental and regulatory compliance. It is targeting $16 billion to $20 billion of investments to grow the business from 2014 through 2018.
The company has taken some key initiatives to achieve its goals. First, the South Carolina Public Service Commission issued a certificate in April, allowing the company to set up a new 750 megawatt combined cycle natural gas plant at its existing W.S. Lee site in South Carolina. The plant is expected to enter commercial service by late 2017.
Second, Duke Energy received a strong response to its request for proposals for regulated solar projects in North Carolina, including both PPA and ownership options. Moreover, it received proposals amounting to nearly three times its goal of up to 300 megawatts of new solar capacity, as announced in April. The achievement of this goal would almost double its available solar capacity in North Carolina. The selected project is estimated to be on-line by the end of 2015.
Third, Duke Energy is on track to negotiate with the North Carolina Eastern Municipal Power Agency regarding its potential to purchase their minority ownership interest in certain Duke Energy Progress plants. It also has plans for new natural gas generation in Florida.
Recently, Duke Energy and Piedmont Natural Gas jointly signed a Build-Operate-Transfer (BOT) contract to build and operate a major interstate gas pipeline in North Carolina. This project is expected to meet the growing demand for natural gas in the Carolinas, which is currently being served by a single major interstate pipeline. All in all, this diverse portfolio of investments supports Duke's commitment to customers and demonstrates its ability to grow and achieve its financial objective.
Valuation and takeaway
The stock looks solid from a valuation point of view. It has a trailing P/E ratio of 26.66, while a forward P/E ratio of 15 indicates earnings growth going forward. Since the company is slated to make aggressive investments over the next four years, it should be able to grow its earnings. In fact, analysts expect the same, as they expect Duke's earnings to grow at a CAGR of 4.19% for the next five years, better than the last five years' growth rate of 3.20%.
Hence, the company should be able to continue its strong run in the future as well, which is why it still looks like a good investment near its 52-week highs.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.