DTE Energy Has Become Attractive Again
Summary
- DTE expects to grow its earnings per share by 6%-8% per year on average until 2027.
- DTE is trading at a forward price-to-earnings ratio of 17.1, which is lower than the10-year average of 18.2 of the stock.
- DTE is offering a 3.6% dividend and expects to raise its dividend by 6%-8% per year until 2027.
- Thanks to all these factors, DTE is likely to offer a double-digit total annual return over the next five years.
ehrlif
In late 2021, I recommended purchasing DTE Energy (NYSE:DTE) for its high dividend yield, its promising growth prospects and its attractive valuation. In the following year, the stock outperformed the S&P 500 by an impressive margin, as it rallied 22% whereas the index shed 7%. At that point, I stated that the stock had become unattractive due to its 10-year high price-to-earnings ratio and its 10-year low dividend yield. Since that article, the stock has declined 21%. In this article, I will analyze why DTE Energy has become attractive again.
Business overview
In the summer of 2021, DTE Energy spun off its midstream segment, which included natural gas pipelines, storage tanks and gathering operations. Thanks to that spin-off, the company has become an almost pure regulated utility and hence its growth has become much more predictable and reliable.
Just like most utilities, DTE Energy enjoys a great advantage, namely its immunity to recessions. This is paramount in the current investing environment. The Fed has been raising interest rates at an unprecedented pace over the last 12 months and it has become clear lately that the central bank will have to raise interest rates even more than initially expected in order to restore inflation to normal levels. Higher interest rates cool the economy by reducing the amount of investments. As the Fed is expected to raise interest rates even further this year, the risk of an upcoming recession has increased.
Fortunately for the shareholders of DTE Energy, the company is essentially immune to recessions thanks to the essential nature of its business. Even under the most adverse economic conditions, consumers do not reduce their consumption of electricity and gas. The resilience of DTE Energy to recessions was in full display in the fierce recession caused by the pandemic in 2020. In that year, the utility grew its earnings per share 12%, from $6.31 to an all-time high of $7.08.
Moreover, DTE Energy has exhibited a decent performance record over the last decade. During this period, the company has grown its earnings per share at a 5.5% average annual rate. This is in line with the growth rate of a typical utility. Even better, DTE Energy is likely to enhance its growth rate in the upcoming years thanks to its promising investment plan.
DTE Energy Growth Plan (Investor Presentation)
According to its 5-year investment plan, DTE Energy intends to invest about $23 billion on growth projects until the end of 2027. As this amount is slightly higher than the current market capitalization of the stock ($22.1 billion), it is evident that the utility is heavily investing in its future growth.
Thanks to its massive investment plan, DTE Energy expects to grow its earnings per share by 6%-8% per year over the next five years. Some investors may consider this growth rate somewhat lackluster but they should realize that this growth rate comes with extremely low risk and resilience to recessions. To cut a long story short, DTE Energy combines promising growth prospects with resilience to recessions and one of the lowest risk levels in the investing universe.
In the near term, DTE Energy has decent business momentum. In 2022, the company grew its earnings per share 2% thanks to rate hikes and cool weather, which benefited the gas business. In addition, management provided guidance for earnings per share of $6.09-$6.40 in 2023. This guidance implies 0%-5% growth vs. 2022.
As management tends to issue conservative guidance, it is reasonable to expect the earnings of DTE Energy towards the upper limit of the guidance. It is also remarkable that DTE Energy has exceeded the analysts' earnings-per-share estimates in 9 of the last 11 quarters. Analysts seem to agree on the promising growth prospects of DTE Energy, as they expect the company to post earnings per share of $6.25 this year and grow its earnings per share by 7.5% per year on average over the next four years.
Valuation
Due to its 21% decline in the last six months, DTE Energy is currently trading at a forward price-to-earnings ratio of 17.1, which is lower than the 10-year average price-to-earnings ratio of 18.2 of the stock. The cheap valuation has resulted primarily from high inflation, which reduces the present value of future earnings.
Fortunately, the Fed has made it clear that it will exhaust its means to restore inflation to 2%. The central bank may cause a recession in the process but a recession will not hurt DTE Energy, which has proved immune to economic downturns. Whenever inflation reverts to the target level of the Fed, the valuation of DTE Energy will probably return to its historical average level.
It is also remarkable that the stock is currently trading at only 12.8 times its expected earnings in 2027. As a utility, DTE Energy is on a reliable growth trajectory and hence it is likely to meet or exceed its expected earnings in 2027, particularly given its solid record of beating the analysts' estimates. Therefore, given the exceptionally low forward price-to-earnings ratio of the stock, patient investors are likely to be highly rewarded in the upcoming years.
Dividend
DTE Energy raised its dividend by 7.6% this year and thus it has now raised its dividend for 14 consecutive years.
DTE Energy Dividend (Investor Presentation)
In addition, the stock has a solid payout ratio of 59%. As a result, DTE Energy can easily continue raising its dividend meaningfully for many more years. In fact, management recently stated that it expects to grow the dividend by 6%-8% per year on average until at least 2027, in line with the growth rate of earnings per share. Therefore, investors can lock in a 3.6% dividend yield and rest assured that the dividend will keep growing significantly for the next several years.
Risk
As DTE Energy is essentially immune to recessions, the only material risk factor for the stock is the adverse scenario of persistently high inflation for several years. In such a case, the valuation of the stock is likely to remain cheap for years. However, the Fed is doing its best to reduce inflation to healthy levels. Thanks to its determination, the central bank is likely to achieve its goal sooner or later.
Final thoughts
DTE Energy has promising growth prospects ahead, with 6%-8% expected growth of earnings per share over the next five years. In addition, the stock is cheaply valued right now and thus it is likely to enjoy a significant valuation tailwind whenever inflation reverts towards its normal range. Moreover, the stock is offering a 3.6% dividend, which is likely to keep rising in tandem with earnings over the next five years. As a result, DTE Energy is likely to offer a double-digit total annual return to patient investors over the next five years.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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