Look to Buy Duke Energy On The Recent Dip

In mid-day trading, investors are still trying to decide what to do with Duke Energy (NYSE:DUK). After an initial spike in pre-market trading, DUK stock is down over 1% after the company reported second-quarter earnings on Monday, August 10.

The report itself was a mixed bag. The company delivered a beat on earnings. Earnings per share for the quarter were $1.08 above the consensus estimate for $1.03. In terms of revenue, Duke came in at $5.42 billion.

Both numbers were less on a year-over-year basis. In the same quarter in 2019, Duke posted earnings per share of $1.12 on revenue of $5.87 billion. Duke did not change its full-year guidance, but forecast that it would fall towards the lower end of its range. Duke also maintains a strong balance sheet with over $8.7 billion in liquidity at the end of the quarter.

The results could draw a raised eyebrow from investors who heard the company say it expected residential demand to pick up during the quarter. The company cited ongoing load impacts from Covid-19, the cancellation of the Atlantic Coast Pipeline as well as unfavorable weather and storms as headwinds that the company would have to overcome. 

The Virus is Creating a Worst Case Scenario

Back in May, Duke Energy and many utility companies were optimistic that the economy would have something resembling a “V-shaped” recovery. Of course there is more that we understand about the virus today than we did then.

However, Duke is not seeing residential demand bounce back as much as expected. And in its investor presentation, the company projects full-year electric volume to fall between 3% and 5%. This decline in revenue is an immediate drag on earnings because of the highly regulated nature of the company’s business. They can’t just raise rates in one area to combat a decline in demand in another.

And unless you have your head completely in the sand, there are still going to be some large venues that will sit empty for the remainder of the year. College football stadiums will sit idle. And although many colleges and universities are welcoming students back to campus, at least 7% and perhaps more will be offering classes exclusively online.

Now add office buildings, arenas, and other venues and you see that Duke’s 3% to 5% number may be low. With that said, the highly regulated revenue stream is a bonus for utility companies during downtimes. That’s because of cost certainty. Generally speaking, people will continue to pay their utility bills even as they contract their budget for other reasons.

And with many of Duke’s service area being in the Southern United States, there will be continued demand for air conditioning barring an early winter.

The stock has some growth possibilities

From a technical perspective, DUK stock was looking like it got a little ahead of itself. So the selloff may be just an example of investors taking some profits and waiting to buy when the stock gets down somewhere in the $80 range. However, the stock is still up over 30% from its March lows.

Duke Energy Remains a Solid Value Play

Duke Energy has long been known as a dividend darling. In July, the company made it 13 consecutive years of increasing dividends. The two cent per share increase bumped the company’s yearly dividend to $3.78. The company also sports a dividend yield of 4.49%.

Some investors may have a little trouble with the company’s payout ratio, but that’s nothing to be too concerned about. Utility companies tend to pay out more of their earnings to shareholders anyway.