Can This Utility Light Your Portfolio?

Is Duke Energy (NYSE: DUK  ) headed higher or lower? That's the question we ask when we evaluate insider buying and selling. We ask because how executives spend their paychecks is often a reflection of what they think of their companies' prospects.

Of course, not all buys are equal. According to two decades' worth of research from Dr. H. Nejat Seyhun compiled in his book Investment Intelligence From Insider Trading, buying is most predictive when (a) it comes from the CEO or other top-level executive and (b) it's performed in bulk. Seyhun found buys of between 10,000 and 100,000 shares to be most informative.

How do Duke Energy's managers measure up against Seyhun's benchmarks over the past year? See for yourself:

Insider Rating Bearish: multiple sales from different insiders at prices lower than the stock trades for currently.
Business Description A major energy utility operating in the southeastern United States.
Recent Price $17.66
CAPS Stars (out of 5) ****
Percentage of Shares Owned by Insiders 0.25%
Net Buying (Selling)* ($581,349)
Last Buyer (% Increase) No purchases in the past 12 months.
Last Seller (% Decrease) Jeffrey Citron, Chairman
4,400 shares at $2.35 apiece on Aug. 10, 2010
(Reduced direct holdings by less than 1%)
Competitors American Electric Power (NYSE: AEP  )
Constellation Energy Group (NYSE: CEG  )
Progress Energy (NYSE: PGN  )

Sources Form 4 Oracle, Capital IQ, and Motley Fool CAPS. (Data current as of Nov. 24.)
*Open-market sales and purchases only.

What we're tracking here, and why
Insider-buying data can be confusing. Here, I'm concentrating only on buying and selling conducted in the open market. With most of these transactions, insiders control the timing. Other times, they're buying or selling under the purview of a 10b5-1 plan. Either way, personal holdings are being bought and sold.

Those personal holdings matter the most -- they're the shares executives hold for investment, rather than compensation. Employee stock options are different; they're compensatory in the purest sense. I've stripped out options-related buying and selling from the calculations you see above.

The Foolish view: bearish
Utilities haven't been the most reliable investments over the past year. Of the stocks listed above, only American Electric Power has outperformed the S&P 500. Duke Energy has run about a percentage point short of the market. Fools don't believe that underperformance will last for long.

"Near term, the company's diverse assets mix and its low risk business model should allow it to maintain [its] above average dividend, which is extremely attractive in this sub 2.5% 10-year Treasury bond environment," wrote Foolish investor soonipi in August.

Good point. Duke Energy has a long history of paying dividends, and it resumed its practice of regularly raising its payout in 2007 after a late-2006 cut. Management's commitment to keep paying dividends makes the stock safer than most.

The worry is that all coal-consuming utilities could see lower profits once pending cap-and-trade legislation becomes law. As soonipi continues:

"Longer term (2+ years), however, capital requirements related to an aging fleet of power plants and more stringent environmental regulations, along with limited opportunities for revenue growth, will put severe pressure on [Duke Energy's] cash flow and EPS making continued growth in the dividend very challenging." [Emphasis added.]

But this may not be as big a problem as bears think. As Motley Fool Income Investor advisor James Early points out, Duke and regional peer Southern (NYSE: SO  ) exist in favorable regulatory environments. Lawmakers and agencies in these regions may choose to minimize the burden.

If only insiders were willing to wait around to find out. Four separate executives have sold since May at prices lower than the stock trades for today. Not exactly the confidence-booster investors are seeking, is it? 

Now it's your turn to weigh in. Log into Motley Fool CAPS today, and tell us how you would rate Duke Energy. You can also post your thoughts in the comments box below or add the stock to your Watchlist.

And if you want me to take a Foolish peek at the insider action of your favorite stock, email me here or use the comments box below. I'll write this column as often as you, our readers, demand.

Southern is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy has its eye on you.

Read/Post Comments (1) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 27, 2010, at 1:28 AM, prginww wrote:

    This stock is a buy at a 6% divd or around l6.

    Long way to go down.

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