This Number Says Investors Should Be Concerned: Duke Energy Corp (DUK)

In fact, among these four utilities, Exelon actually tied with Consolidated Edison for the lowest debt-to-equity ratio at 0.83. By comparison, Duke’s debt-to-equity ratio is 0.87, and Southern Co.’s ratio is 0.98. So it’s not this ratio that caused Exelon’s management to cut the dividend.

However, when we look at the interest each utility pays on their debt, we find a different story. When I crunched the numbers, I found a disturbing similarity between Exelon and Duke. Exelon’s full-year interest expense was 32.06% of their full year sales. In other words, for every $1 in sales, Exelon paid $0.32 in interest. Since Consolidated Edison and Southern Co. pay $0.26 and $0.20 in interest per dollar of sales, you can see that investors should be more comfortable with these companies.

The negative news for Duke investors is, because of the Progress merger, Duke pays almost $0.40 of every dollar in sales just to cover interest expenses. This literally means that Duke is paying relatively more interest per dollar of sales than Exelon, and Exelon just had to cut their dividend. Now it’s true that Duke may grow their sales enough to bring this ratio in line with their stronger competition, but what if they don’t?

I Just Can’t Do It
It’s easy to recommend staying away from Exelon now that their dividend is 3.8% and analysts expect negative earnings growth in the near future. On the other hand, Consolidated Edison pays a yield of 4.36%, and has one of the lowest P/E ratios, of the group. When you add in the fact that the company has the second highest operating margin, and the strongest balance sheet, it’s easy to see why investors like the stock.

Southern Co. is even easier to recommend with a 4.46% yield, the best operating margin, and the lowest percentage of interest expense to dollar of sales. Southern Co. is also expected to grow earnings by 4.86%, which is faster than any of their competitors. If you have to choose a utility, this one should be at the top of your list.

Duke Energy is a different story. The company’s yield of 4.5% is slightly better than the others, but in most other measures the company isn’t doing as well. They have the second lowest operating margin, the second worst balance sheet, and the highest percentage of interest to dollar of sales. The fact that the company hasn’t consistently generated free cash flow is a major concern. If the company fails to generate significant cost savings from the Progress merger, this “stable” utility’s dividend could be in serious trouble.

The article This Number Says Investors Should Be Concerned originally appeared on Fool.com and is written by Chad Henage.

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