DTE Energy Offers A Rare Combination Of Attractive Yield And Strong Growth

Dec. 12, 2019 1:07 PM ETDTE Energy Company (DTE)8 Comments11 Likes
Aristofanis Papadatos profile picture
Aristofanis Papadatos
8.06K Followers

Summary

  • In the current environment of low interest rates, most investors are struggling to identify stocks with attractive yields and reasonable valuation levels.
  • DTE Energy is a rare utility stock, as it combines an attractive yield with strong growth prospects.
  • DTE Energy is offering a 3.2% dividend yield and is likely to grow its dividend by about 7% per year for at least the next five years.

Due to the cuts of interest rates by the Fed and the all-time high level of the S&P, it has become quite challenging for investors to identify stocks with attractive yields and reasonable valuation levels. Many investors have resorted to utilities in order to lock in decent yields, but utilities have enjoyed a relentless rally, which has rendered them fully valued or overvalued. DTE Energy (NYSE:DTE) is superior to most utilities and provides an interesting investment option for investors, as the company is growing much faster than the vast majority of its peers.

Business overview

DTE Energy is different from the other utilities, as it has non-utility activities apart from its utility divisions. The company generates 70%-75% of its operating income from its utility segments, namely the electric and gas divisions, and 25%-30% of its operating income from its non-utility segments, namely gas storage & pipelines, power & industrial projects and energy trading. The non-utility segments help the company grow much faster than its peers.

DTE Energy has a decade-long record of exceeding its original guidance and outperforming its peers by a wide margin. During the last decade, the stock has tripled whereas the Utilities Select Sector SPDR ETF (XLU) has advanced only 113%. This extent of outperformance is striking in the slow-growth utility sector.

Moreover, DTE Energy is remarkably proactive in reducing its carbon emissions. Its management has set goals to reduce carbon emissions by 50%, 80% and 100% by 2030, 2040 and 2050, respectively. Furthermore, the company recently doubled its planned investment in renewable energy for the next three years from 1,000 MW to 2,000 MW. This strategy is prudent, as it is becoming increasingly costly to purchase rights for carbon emissions. In addition, this environmental-friendly strategy helps the company maintain good relationships with regulatory authorities and thus enjoy decent rate hikes in its regulated business.

Growth prospects

Despite its impressive performance over the last decade, DTE Energy does not rest on its laurels. The company continues to invest heavily in its utility infrastructure while it also takes advantage of investing opportunities in its non-utility segments. DTE Energy plans to invest $19 billion in growth projects over the next five years. As this amount is 79% of the current market cap of the stock, it is evident that the company is investing heavily in its growth projects.

Part of future growth will be driven by the recent acquisition of a gathering and pipeline system in Louisiana’s Haynesville for $2.65 billion. After a flat production period, Haynesville has grown its shale oil production by 28% per year in the last two years thanks to technological advances. It has thus become the second-fastest growing shale oil basin in the country, behind the Permian Basin. Haynesville is expected to grow its production by 8.4% per year on average over the next four years. It will thus be a meaningful growth driver for DTE Energy.

As mentioned above, DTE Energy has outperformed the vast majority of its peers over the last decade. During this period, the company has grown its operating earnings per share at an 8.1% average annual rate, which is the second-highest in its peer group.

DTE Energy EPS growth rate

Source: Investor Presentation

Moreover, the company expects to grow its earnings per share by 5-7% per year on average over the next five years. This is certainly an attractive growth rate, particularly given the current phase of the economic cycle, after a whole decade without a recession. It is also worth noting that most utilities are growing at much slower rates due to their lackluster growth projects and the high interest expense they have to pay due to their excessive debt loads. DTE Energy has a healthy balance sheet, with an investment-grade rating, as its interest expense consumes only 37% of its operating income.

Dividend

DTE Energy is currently offering a 3.2% dividend yield. While this yield is not exciting, it is higher than the 3.0% average dividend yield of the utility sector right now. Even better, DTE Energy has a payout ratio of 65%, which is markedly low for a utility stock and provides a great margin of safety for the dividend.

Moreover, thanks to its promising growth prospects, DTE Energy expects to grow its dividend by 7% per year for at least another two years. As the company has maintained a payout ratio around 60% over the last decade and expects to grow its earnings per share by 5%-7% per year over the next five years, investors can reasonably expect the company to continue raising its dividend by about 7% per year over the next five years.

Overall, DTE Energy is offering a decent dividend yield, with a wide margin of safety, and the company is likely to keep raising its dividend much faster than the vast majority of the other utilities.

Final thoughts

Due to suppressed interest rates, many investors have rushed to buy utility stocks in order to secure decent yields for their income portfolios. However, these stocks are trading at markedly rich valuation levels and hence they will have significant downside risk whenever interest rates rise. Income-oriented investors should consider purchasing DTE Energy, which is growing much faster than its peers and thus offers a rare combination; an attractive yield and promising growth prospects.

This article was written by

Aristofanis Papadatos profile picture
8.06K Followers
I am a chemical engineer with a MS in Food Technology and Economics. I am also the author of 2 mathematics books ("Arithmetic calculations without a calculator" and "Word Problems") and perform almost all the calculations in my mind, without a calculator, making it easier to make immediate investing decisions among many alternatives. I invest applying fundamental and technical analysis and mainly use options as a tool for both investing and trading. I have nearly achieved my goal of early retirement, at the age of 45. In my spare time, I follow Warren Buffett's principle: "Some men read playboy. I read financial statements".
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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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