Duke Energy Corp (DUK): A Good Investment in the Utility Sector

Duke Energy Corp (NYSE:DUK) is an energy company owning nuclear, natural gas, coal-fired and hydroelectric generation. Headquartered in Charlotte, Duke Energy Corp (NYSE:DUK) operates in the United States providing nearly 20000 megawatts of owned electric capacity to over 2 million customers. It is a Fortune 250 company having a diverse fuel mix. Although utility companies are unlikely to experience substantial capital appreciation, this one is a worthwhile investment.

Electric utilities industry

The main revenue driver of the electric utilities industry is customer usage, which fluctuates with weather conditions, behavior patterns, and the cost of energy services. Decline in demand for electricity may lead to reduced overall electricity sales and has the potential to diminish cash flows of the companies. In addition to this, if the economy is weakening, delays in customer payments and higher recovery costs can have a significant impact.

The earnings of companies within the electric utilities industry are also impacted by fluctuations in commodity prices. This leads to higher earnings volatility especially because such businesses are unregulated. To mitigate such kind of risks, companies like Duke Energy Corp (NYSE:DUK) enter into derivative instruments that can hedge some of the exposures but not all. Some of Duke Energy’s investments are situated outside the United States which expose it to various kinds of political and economic risks of other countries, such as taxes, currency rate fluctuations, and foreign government policies.

Duke Energy past performance

Duke Energy have performed exceptionally well in the past few months. After reaching an all-time low of $59.63 on November 15 last year, Duke Energy has gained momentum and has been rising steadily since. The fourth-quarter net income of the company was $435 million, more than $288 million in the previous year. With a market capitalization of $51 billion, Duke Energy Corp (NYSE:DUK) is one of the best dividend paying companies. During 2012, the company paid a dividend of $3.03 per share and has a history of regularly increasingly dividends. In the past quarter, Duke Energy has shown an exceptional growth in both revenues and earnings. For the record, in the past 3 years, the revenues have been increasing at an average rate of 15%.

Future investments

Duke recently announced the opening of Dan River Natural Gas Combined Cycle Station in Eden, N.C. The new station is part of the company’s modernization effort to retire older, less-efficient coal plants and replace them with cleaner-burning natural gas-fuelled units. Such units will result in reduced emissions and higher efficiency. Duke Energy merged with Progress Energy in July 2012. The merger is set to create the largest electric utility in the United States, with over 7 million customers in six states in the Southeast and Midwest. The revenues generated from the merger has already started to generate returns.

Competitor Analysis

If I compare the performance of Duke Energy Corp (NYSE:DUK) vis-à-vis its competitors, it has the best dividend yield (4.2%) in the industry. Also the price to equity (P/E) ratio stands at an impressive 24 which signifies the stock is correctly priced with immense growth opportunities.