Is Duke Energy a Good Stock to Buy?

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Utilities are typically a good pick for defensive investors who are worried about market declines, as well as for income investors who want to collect dividends. Either of these groups should be quite interested in Duke Energy (NYSE: DUK). Its beta, a statistical measurement of how closely a stock tends to move with the market, is a very low 0.2; however, the downside to such a weak relationship is that the stock is down so far in 2012 while the broader market is having a good year. However, its dividend yield of 4.7% is very high, and is actually a bit lower than what the company has paid on average over the last five years.

Duke Energy’s most recent 10-Q is not that exciting. Revenue for the quarter was up 1% compared to the second quarter of 2011, and net income was up 2%. Earnings were actually down in the first quarter of 2012, which meant that in the first half of the year Duke’s net income was down by 22%; but this looks to have been due to impairment charges rather than any normal costs of doing business. Cash flow from operations was actually up, with Duke investing the $2 billion it received in the first six months of the year, as well as another couple hundred million dollars in capital expenditures.

Duke’s trailing P/E is 19, which given the low growth rate would not normally be a good multiple from a value perspective. That trailing earnings figure does include Duke’s impairment charges, which in theory will not be recurring, so perhaps it might be more accurate to consider annualizing the most recent quarter (which produces a P/E of 16), or looking at analyst expectations for 2013 (which imply a forward P/E of 15).

The second quarter of 2012 saw several large hedge funds increase their positions in Duke, whether because they were preparing for a bear market or some other factor. Renaissance Technologies, whose founder Jim Simons is now a billionaire because of the fund’s success, increased its stake to 5.4 million shares (see more stock picks from Renaissance Technologies). Roundkeep Capital Advisors initiated a position of 2.1 million shares during the quarter; managing partner Erwin Shindell had previously worked at Citadel for 10 years (find more stocks Roundkeep bought). Billionaire Israel Englander’s Millennium Management also added shares, closing June with a total of 1.8 million shares in its portfolio (research more stocks that Millennium owned).

Southern Company (NYSE: SO), Dominion Resources (NYSE: D), NextEra Energy (NYSE: NEE), and American Electric Power (NYSE: AEP) are four other large-cap utility companies. Southern and Dominion carry forward P/E multiples of 16, and the other two peers trade at 14 times forward earnings estimates, so Duke (narrowly the largest in terms of market cap) is square in the middle of its peer group. Duke also has the largest dividend yield, though certainly the other utilities pay considerable dividends as well- generally about 4%, except for NextEra, which pays 3.4%.

Southern and Dominion had their revenues and earnings decline in their most recent quarter compared to a year earlier, so we don’t think they should trade at a premium (based on forward earnings) to Duke like they currently do. Both NextEra and American Electric Power, meanwhile, managed to deliver earnings growth despite lower revenues. We don’t see much difference between their earnings growth and what Duke achieved, and given their lower yields and smaller size we would say they should trade at a slight discount- which they do.

Duke seems fairly valued compared to NextEra and American Electric Power as a larger, higher-yielding utility with a slightly higher forward P/E. However, it does seem to be better on an income or a value basis than Southern or Dominion. 

This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Dominion Resources and Southern Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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