Why Duke Energy Could Be the Perfect Utility Stock to Buy Now

Key Points

• During market volatility, investors might want to pay attention to some of the safer places in the market, which have added tailwinds. 
• The utility sector tends to do well in lower interest rate environments, and Duke Energy stands out for its growth and upside potential.
• A reliable dividend that institutions are buying, and one that Wall Street analysts are boosting ahead of bullish price action.

The S&P 500 index has experienced increased volatility lately, which will cause money to shift in a few select ways as a reaction. This is often called a flight to safety, or risk-off, a way to keep capital safer in places that experience less volatility and risks in business models. Most investors would think of the consumer staples sector when reading this, but that’s only the beginning.

Surely, staple brands like Costco Wholesale Co. NASDAQ: COST will have done well in most economic environments. Still, today, there’s a perfect mix that historically benefits another sector the most. Utility stocks are another safe place for investors to keep their capital, as they are inflation and recession-resistant, with an added bonus that could kick off now that the yield curve (ten-year yields minus two-year yields) is steepening.

The utility sector is typically capital-intensive and carries more debt than other niches in the market, so a steepening yield curve along with interest rate cuts from the Federal Reserve could significantly boost returns in this space. For these and other reasons, investors should keep an eye on Duke Energy Co. NYSE: DUK as a potential safe port during the storm that may hit the stock market in the coming quarters.

Why Market Uncertainty Is Driving Interest in Duke Energy Stock

Starting with the best and most straightforward indicator of price action, investors can notice one interesting trend in Duke Energy stock compared to the broader S&P 500. This utility stock trades at a new 52-week high, while the stock market index has sold off by nearly 10% from its recent highs.

This divergence in price action tells investors something, as the favor is running out for the technology sector with names like Alphabet Inc. NASDAQ: GOOGL and artificial intelligence darling NVIDIA Co. NASDAQ: NVDA going down to a respective 78% and 76% of their 52-week high prices.

So, why is the market favoring the utility sector's non-cyclical features? It’s because of uncertainty. The market is excited about interest rate cuts, but some worry that this means the admittance of a troublesome economy. More than that, election uncertainty makes the future less clear, especially when it comes to policy and spending views.

Duke Energy’s financials show that up to 62% of capital is debt, and lower interest rates coming this quarter could also mean lower interest expenses for Duke Energy in the next few quarters. With this in mind, Wall Street analysts have started rolling out more optimistic quarterly earnings forecasts through 2025.

Leaning on this bullish evidence, the Royal Bank of Canada has placed a $135 price target on Duke Energy stock, daring it to rally by as much as 14.6% from where it trades today. This is not only a new 52-week high, but it also offers more upside than most investors would expect from a utility stock.

Duke Energy Stock Gains Attention from Investors, with Markets and Institutions Bullish

Other than price action, another way to gauge the market's sentiment toward Duke Energy stock is its valuation compared to the rest of its peers. Investors should look for outliers in this case, as markets typically overpay (or underpay) for a particular stock when a strong belief is present.

Duke Energy stock trades at a price-to-earnings (P/E) ratio of 29.4x, significantly above the electric services industry's average valuation of 16.7x P/E. Another metric, price-to-sales (P/S), shows a similar trend, as Duke Energy trades at 3.0x compared to the industry's average of 2.3x.

Markets' willingness to pay a premium for this stock could be tied to the lower interest rates coming ahead, as investors now understand that lower interest expenses may also amplify net earnings.

Others in the market believe Duke Energy stock could make new highs soon. Up to $2.6 billion of institutional capital has entered the company over the past 12 months. Out of all these buyers, Mackenzie Financial Group decided to take the lead in recent buying activity.

By boosting their holdings in Duke Energy stock by 65.7% as of August 2024, Mackenzie now holds up to $205.8 million worth of this utility stock today. Following this trend, the Canada Pension Plan Investment Board added 8% to Duke Energy stock, bringing their net investment up to $135.5 million today.

Even if the low beta of 0.46 in Duke Energy stock is too slow for investors, that's okay because they can beat inflation and probably some of the uncertainty price swings in the S&P 500 through the stock's $4.18 payout, translating to an annual dividend yield of 3.55% for shareholders.