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Berko: Duke Energy keeps its eye on renewable future

By Malcolm Berko

Published: April 14, 2019, 6:05am

Dear Mr. Berko: I’d like to purchase 300 shares of Duke Energy to add some income to my conservative growth account. What is your opinion of this utility?

— T.L., Kankakee, Ill.

Dear T.L.: UBS’s Daniel Ford is recommending Duke with a short-term $91 price target, and Merrill Lynch recently downgraded it to neutral from buy. But Vanguard owns 56 million shares, BlackRock has 48 million, while other funds own tens of millions of shares.

Duke Energy’s (DUK-$89.10) history began in the early 1900s when Dr. Walker Wylie and James Duke (a tobacco magnate) led a group that constructed a system of dams and lakes along the Catawba River to produce electricity to power the economy of the Carolinas. In 1917, The Watertree Power Co. became a holding company for several utilities that had been owned by Duke and his associates, and in 1924 the name changed to Duke Power.

Duke Energy has nearly 60,000 megawatts of generating capacity and 30,000 employees. Its service area (both Carolinas, Kentucky, Florida, Ohio, Indiana and Tennessee) has a population of 25 million, covering 95,107 square miles. DUK provides electrical power to 7.7 million industrial, commercial and residential customers in those states via 277,000 miles of distribution lines and a 32,000-mile transmission system. DUK also serves 1.6 million natural gas customers through a 33,000-mile natural gas transmission line and 27,000 miles of natural gas service pipelines.

Kudos to Lynn Good, the CEO and president. DUK posted record revenues in 2018 of $24.3 billion, record earnings of $4.45 a share and a record dividend of $3.79 that yields a comfy 4.4 percent. Before joining DUK, this classy lady was among the first female partners of Arthur Andersen. Following the collapse of Andersen in 2002, Good joined Cinergy and landed at DUK when DUK purchased Cinergy in 2006. What a wonderful opportunity for DUK! This remarkable woman became CEO in 2013, was elected chairman of the board in 2016, and has become one of the world’s most respected corporate leaders. She is certainly among the most powerful women in the United States.

DUK is a company that is proactively preparing for the future. Good has made DUK one of the nation’s most aggressive renewable energy investors, completing two gas-fired generating units in late 2018. And this year DUK should complete a $1.1 billion gas-fired plant to serve the western Carolinas. DUK owns 800 megawatts of solar power capacity and intends to accumulate in excess of 3,000 megawatts by 2024. The company produces 2,500 megawatts of wind power and manages 1,700 megawatts of wind facilities for third parties.

In the coming five years, Good wants to double DUK’s wind power output, and she’s planning construction of a $260 million liquified natural gas facility to be completed in 2021. DUK’s 47 percent interest in a $7.5 billion, 600-mile Atlantic Coast Pipeline has been delayed by the U.S. Fish & Wildlife Service, but should also be completed in 2021.

Management expects 2019 to be an outstanding year, earning $4.95 a share, up from last year’s $4.45, thanks to attractive rate increases in the Carolinas and Florida. Good also plans rate hikes in Ohio and Tennessee and a gas hike of 10.5 percent in Kentucky. These rate hikes and continuous attention to efficiencies, synergies, etc. allow DUK to target annual earnings growth between 4 percent and 6 percent. And that growth target should also allow the board to generate dividend growth between 4 percent and 6 percent. I’d reckon this will produce total returns over the coming three to five years significantly above most other utilities.

Going out to five years, the Street feels DUK can conservatively produce earnings of $5.85 a share and a dividend of $4.55. And if these numbers are reached, DUK could trade in the $115 range. Do buy DUK!

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