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.
CenterPoint Energy, Inc. (NYSE:CNP) is a public utility holding company engaging in the electric transmission and distribution business in the Texas Gulf Coast, which includes the city of Houston. Its largest business, Houston Electric, posted an operating income of $492 million. The customer growth is expected to grow by 2% for 2013. CenterPoint Energy, Inc. (NYSE:CNP) has a much smaller market cap ($10 billion) than Duke Energy. Its operating cash flow is also in the lower range which signifies that it is difficult for the company to make new investments.
The Southern Company (NYSE:SO) is another public holding supplying power to the states of Alabama, Georgia, Florida and Mississippi. The company has a P/E ratio of 17.9 and a dividend yield of 4.1%, both lower than Duke Energy. The stock had made a consistent upward trend from the last 4 months like Duke Energy. However, the revenue growth estimates are much lower for the coming years.
Conclusion
Duke Energy Corp (NYSE:DUK)’s performance has been at its peak for some time now out of all the utility stocks. The company made some huge capital expenditure in the recent past, but still it has been able to increase its dividends year on year. With a strong revenue and earnings growth, the stock is a safe pick for dividend investors. Moreover, the new investment plans lying ahead will enable Duke Energy Corp (NYSE:DUK) to generate strong cash flows in the future which is a primary requirement of such high risk businesses. Even if there is a downturn, the cash flows generated over the lifetime of the project will mitigate the risk to a large extent. To sum it up, I would prefer this stock the most in the electric utility industry both for its stronger risk handling capabilities and the consistent earnings growth over the years.
The article A Good Investment in the Utility Sector originally appeared on Fool.com and is written by Sujata Dutta.
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