Duke Energy (DUK) rocked its second quarter earnings on Thursday, reporting an 80% increase in profit. Not surprisingly, DUK stock closed up a little more than 1%. It’s great to flash eye-popping profit growth after earnings — particularly since this Duke Energy has a very attractive current dividend yield of 4.5% — but is that enough to make DUK stock a buy now?
Let’s break it down:
First, the second-quarter earnings: Duke Energy reported earnings per share of $1.11, blowing away Wall Street’s expectations of 98 cents. While Duke Energy’s $5.95 billion in revenue was softer than analysts’ consensus of $6.12 billion, DUK did manage to beat the $5.88 billion from the year-ago quarter. DUK also raised its full-year guidance by a nickel on Thursday; the company now expects EPS to come in between $4.50 and $4.65.
Duke Energy is investing for the future, planning to invest between $16 billion and $20 billion over the next four years in new generation projects, regulatory compliance and new infrastructure. DUK also is on target to sell its Midwestern power generation assets this year, which could bring in as much as $2 billion in cash.
But one quarter of scorching hot earnings don’t necessarily make it a buy. So how do you know? Here are three pros and 3 cons for DUK stock:
Duke Energy Pros
Monster 4.5% dividend yield: Utility stocks are famous for their attractive dividend yield, and DUK stock boasts a 4.5% payout. That dividend yield is near the top of a utility sector that averages near 4%. But income investors at or nearing retirement want a high dividend and a good track record of regular payouts. Well, Duke Energy is in the 88th consecutive year of quarterly dividends and the seventh consecutive year of dividend increases.
The Duke-Progress combination is delivering value: Two years into its mega-merger with Progress, Duke Energy is experiencing solid economies of scale. DUK CEO Lynn Good told analysts on Tuesday that the combined company has achieved nearly half of its total five-year targets in just two years.
Latin America feeds revenue growth: The lion’s share of Duke Energy’s international business comes from Argentina, Brazil, Chile and Peru, where it produces and markets electricity and natural gas. While Latin America accounts for less than 10% of DUK’s revenue, it is a high-growth market that will continue to grow business and residential power use. Duke Energy’s dams in Brazil could face some short-term weakness because of a severe drought.
Duke Energy Cons
Thanks to EPA, king coal is not merry: Despite DUK’s moves to boost renewable energy, coal still generates about half of all the power in the U.S. In June, the EPA proposed regulations to slash carbon emissions from coal plants by 30% over the next 16 years. That change is bound to have an impact on margins. Duke Energy is also facing investigations from state and federal regulators over 33 coal ash ponds in North Carolina where Duke Energy stores 100 million tons of coal ash, which threatens groundwater, wildlife and the environment. In April, DUK told a North Carolina commission that the total cost of cleaning up the plants could cost $7 billion to $10 billion and take up to 30 years to complete.
Dan River debacle: Duke Energy continues to come under fire from legislators and consumer advocates in North Carolina after some 39,000 tons of coal ash spilled into the Dan River in February. Working under guidance of the Environmental Protection Agency (EPA), Duke Energy has spent some $20 million to date cleaning up the spill and CEO Lynn Good said the total clean-up costs will have a “material” impact. But only 4,000 tons of coal ash has been cleaned up to date, leaving more than 90% of the spill still in the river.
DUK’s ‘payment processing delay fiasco’: Duke Energy got another PR black eye last month when WRAL, a TV station in Raleigh, NC documented payment-processing delays that triggered late fees and higher deposits from customers. A company spokesman attributed the payment processing problems to “growing pains” from its merger with Progress Energy in July 2012. Widespread complaints from rate payers can come back to haunt utilities — particularly when they seek approvals to hike rates in the future.
Bottom Line: DUK stock is a buy now. Duke Energy’s forward P/E of less than 15 is on par with its utility sector peers and DUK stock has gained about 4% year to date. The coal headwinds notwithstanding, DUK stock should continue to post stable growth for at least the balance of the year — and it’s hard to ignore that 4.5% current dividend yield.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.