When I was a kid, my dad constantly reminded my siblings and me to turn off the lights when we went out of a room. I remember more than once he'd informed us that he didn't work for the electric company. As I grew older and wiser I found out that you didn't have to work for the electric company to benefit from all those lights being left on. Instead, you could own stock in the electric company and enjoy a nice stream of dividends as the company profited from keeping those lights on.
One such company that should be on any income seeking investor's radar is Duke Energy (NYSE: DUK ) . Based in Charlotte, N.C., Duke Energy has been keeping the lights on for more than 150 years. However, before considering whether to buy stock in the company, here's three very important things you need to know.
It's getting gassy
Duke is the largest utility in the U.S. by almost any metric. It has more than $100 billion in assets including 58 gigawatts of generating capacity all design to power the lives of its 7.2 million customers. That's more than nuclear kingpin Exelon's (NYSE: EXC ) nearly 35 gigawatts of generating capacity as well as its 6.6 million customers. It's also larger than wind-powered NextEra Energy's (NYSE: NEE ) more than 41 gigawatts of capacity as well as its 4.6 million customers.
What's important here is that Duke Energy is really cleaning up that generating portfolio by shifting away from coal. However, it's shifting much more into natural gas generation as opposed to renewables. By 2015 the company plans to cut coal's portion of its generation portfolio from 55% in 2005 to 38% by 2015. Meanwhile the natural gas portion will go from just 5% all the way to 24% over that same time frame. Given the amount of natural gas we've discovered, and its low price, that move makes a lot of sense.
Merger with Progress
The other move that made a lot of sense is the company's merger with Progress Energy. According to Duke, the purpose was to create a low-risk, predominantly regulated business to generate reliable earnings and cash flow. Part of the draw in acquiring Progress is that 100% of its earnings are regulated against just 77% for Duke Energy. Now the combined company isn't just the country's largest utility, but 85% of the earnings are regulated. For a dividend-seeking investor, you'll want the stable earnings from the more regulated business mix.
Over the next few years Duke Energy plans to spend about 30% of its annual $6 billion capital budget on growth projects. The addition of cheaper natural gas to its regulated business should lead to 4%-6% long-term earnings growth. Further, Duke Energy believes it has the ability to grow its stock dividend even as it maintains a target payout ratio of 65%-70%. Given that the dividend on its stock has been growing at a 2% annual rate that's the minimum that I'd expect to see going forward.
Overall, that's pretty good growth for a utility. It's fairly in line with what we can expect from its industry peers like NextEra or Dominion (NYSE: D ) . Though, I will point out one key difference, Dominion has been able to grow its dividend by 7% annually the past few years and believes it can keep up the pace given its plan to grow earnings by 5%-6% through 2018. Meanwhile NextEra sees 5%-7% earnings growth through 2016 with a plan to boost its dividend 10% annually through 2014. All that means is that an investment in Duke Energy will come with slower dividend growth.
To summarize, Duke Energy offers investors several fairly compelling reasons to buy its stock. Not only is it the nation's largest utility, but its earnings are now more secure while still growing in the future. As you can see on the slide below, the company offers a lot to investors including scale, diversity, and flexibility:
The bottom line here is that while Duke Energy might not be the fastest-growing utility, it does offer slow and steady growth. Slow and steady, as you know, is what wins the investing race and is what makes Duke Energy's stock a solid choice for your investing dollars.
However, it's not the only choice. As the nation moves increasingly toward clean energy, Exelon is perfectly positioned to capitalize on having the largest nuclear fleet in North America. This strength, combined with an increased focus on balance sheet health and its recent merger with Constellation, places Exelon and its resized dividend on a short list of the top utilities. To determine if Exelon is a good long-term fit for your portfolio, you're invited to check out The Motley Fool's premium research report on the company. Simply click here now for instant access.