Duke Energy Corp (NYSE:DUK) is one of the biggest electric utilities on the East Coast. It operates in three divisions — Electric Utilities, Gas Utilities and Commercial Renewables, and all its complementary infrastruction and support services are in each designated division.
Its Electric Utilities is its biggest segment, producing, distributing and selling electricity across the Carolinas, Florida and the Midwest. It has 7.6 million customers across its service area.
Gas Utilities has 1.5 million customers in North Carolina, South Carolina, Tennessee and parts of Ohio and Kentucky.
Finally, the Commercial Renewables division operates commercial wind and solar that supplies 14 states with almost 3 GW of electricity.
The trouble with utilities investing over the past year or so (DUK stock is off slightly more than 9% in the past 12 months) is first the threat of the Federal Reserve raising rates, and then the Fed actually doing it.
Duke Stock’s Interest Rate Issues
You see, utilities have huge amounts of infrastructure to support when it comes to generating and distributing its product — power. There’s everything from getting coal and natural gas to its power generation plants to distributing the resulting electricity on power lines, through all the step-down substations, and then delivering it to your door.
Keeping that electricity available and the delivery reliable is something few people think about because it has become so consistent that we don’t even question whether there will be power when we turn on a light or run the dishwasher.
But the fact is, utilities are on the hook for keeping their services reliable to their entire customer base, and that costs money.
When rates rise, it means utilities have to borrow at higher rates, which cuts into their margins because they are highly regulated and can’t simply raise prices when their costs go up.
As soon as there is a hint that rates will rise, traders start selling utilities.
And this isn’t unique to DUK. All the major utilities are in the same boat. This is a sector selloff, it’s not specific to anything DUK is doing or not doing.
As a matter of fact, Duke stock is doing quite well, all things considered. It has a relatively large amount of coal-powered power plants, but that currently isn’t an issue since the federal government is now supporting the coal industry. That means at least for the near term, its coal plants don’t need to convert to natural gas, which save those expenses.
On the other hand, like many large utilities, DUK has unregulated operations that support its regulated business. They have divisions that simply trade energy commodities so they can hedge their energy supplies to keep costs stable. And Duke stock also has a midstream operation for its natural gas business.
That means DUK has its own pipeline for its unregulated natural gas business. This is a solid source of revenue moving forward, whether it’s shipping gas to its regulated energy business, shipping gas to others or shipping other energy companies’ products.
And its 4.7% dividend certainly helps pay for your patience as it takes cyclical hits from the markets. But as DUK delivers over the coming quarters, those bears will drift away, Duke stock will be back on top and you’ll have bought at a great discount.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.