Despite Lower Earnings, Duke Energy Is a Strong Buy for Value Investors

Duke Energy (NYSE:DUK) reported first-quarter 2020 earnings and revenue that came in below analysts’ expectations. However, the company reaffirmed its guidance for 2020. The company posted adjusted earnings per share (EPS) of $1.14. This was down from the adjusted $1.24 EPS the company posted in the first quarter of 2019. However, the company maintained its prior full-year guidance for adjusted EPS in the range of $5.05 to $5.45.

Duke Energy said it noticed a significant decline in demand starting in March. The company expects demand from those segments to remain under pressure through the third quarter. However, the company is confident that it will make up for some of that demand because of an increase in residential use. Overall use was down about 5% through March 31, 2020.

Like all utilities, virtually all of Duke’s existing business is regulated by the government or tied to long-term contracts. This is one of the reasons that Duke Energy is considered a defensive stock.

As part of its sustainability report, Duke Energy reported that it was named one of the industry’s top leaders in safety performance for five years in a row. And the company continues to provide electricity at prices below the national average in the states it services.

Not Virus Proof, But Virus Resistant

The novel coronavirus, and the Covid-19 disease that it spawns, is hanging over every company’s earnings reports. And Duke Energy was no exception. In its presentation to investors, Duke projects a downside impact of 25 cents to 35 cents to its 2020 earnings per share EPS. This will be due to retail load declines from the pandemic.

However, the company is confident that they can save $350 to $450 million through cost-cutting measures. Most importantly, at this time the company does not have plans to reduce staffing in any capacity.

However, at least one analyst firm believes that utility companies like Duke are being overly optimistic. Sector & Sovereign Research is arguing that utilities may be too optimistic about the economic recovery. If the re-opening of the economy does not happen as quickly or as strongly as these companies are projecting, that could put pressure on future earnings.

Of course, the opposite can be said as well. If the re-opening goes faster or stronger than expected, the earnings guidance may be too low. It’s fair to say that utilities are a bit more insulated from the effects of something like a pandemic. This is because, at the very least, a utility like Duke Energy is not facing a zero revenue situation.

Duke Energy Retains a Strong Balance Sheet

During the conference call following the earnings announcement, Duke reported it had $8.2 billion in liquidity. The company also announced it can receive up to $400 million from the CARES act. Much of that liquidity will come in the form of $285 million of AMT tax credits. This would double the amount of AMT tax receipts for the year.

Duke maintains a ratio of earnings before income task, depreciation and amortization (EBITDA) of 5.2 times. In comparison to other utilities, this is not high, but in the higher part of the range. But with plenty of liquidity, investors should not be too concerned about the leverage that the company uses.

A Leader in Sustainability

Duke Energy is a leader in generating revenue from renewable energy projects. The company currently owns, operates, and contracts over 8,000 megawatts from wind and solar projects. And in Duke Energy’s most recent Sustainability Report, the company highlights its progress toward its sustainability goals.

Duke Energy exceeded its goals to reduce consumer consumption and lower peak demand in 2019. And the company has set even more aggressive goals in 2020. And Duke plans to increase its footprint in renewable energy from the 8,000 megawatts of capacity it had at the end of 2019 to 16,000 megawatts by the end of 2025.

Value Investors Can Rely on Duke Energy’s Dividend

Of course, one of the reasons that utility stocks make sense in any investor’s portfolio is because they typically pay a reliable dividend.

Duke Energy has been paying a dividend for 94 consecutive years and has increased its dividend in each of the last 13 years. Duke Energy’s dividend yield is currently 4.59%. The company issued its most recent dividend of 94 cents per share on May 7, 2020. The dividend will be paid on June 16, 2020. The ex-dividend date is May 15, 2020.