Investors who love to receive hefty dividends from their stocks, particularly those in or nearing retirement, should look to the utility sector. Utilities not only provide dividend yields that are far better than the yield on the broader market, but their underlying businesses offer slow and steady growth. For the most part, utilities aren't volatile, since they operate in a highly regulated industry.
At the same time, not all utilities are created equal. It's definitely possible for even well-managed utilities to lose their way. Despite some notable short-term pressures, Duke Energy (NYSE:DUK) is a clear winner among utilities, and has a bright future ahead of it.
Duke's promising near-term outlook
Duke's adjusted earnings fell in the third quarter and are down about 10% year to date. This was due to unfavorable weather conditions and higher expenses related to depreciation and amortization. It's been a tough year for many utilities, not just Duke but also Consolidated Edison (NYSE:ED).
Consolidated Edison's earnings per share over the first nine months are down 11% as the company continues to invest heavily in fortifying its infrastructure post-Superstorm Sandy. The remainder of this year is expected to be weak as well. Consolidated Edison guides investors to expect full-year 2013 earnings between $3.70 per share and $3.80 per share, which would represent a year-over-year decline.
Over the next few years, Duke's earnings growth should be modest yet sustainable. Between 2013 and 2015, Duke expects to produce 4% to 6% growth in EPS, which would represent the steady, consistent growth that well-run utilities are known for. Earnings growth is to be fueled by Duke's investments in regulated businesses, where favorable rate case outcomes in the Carolinas and Ohio will all but assure modest growth. All told, management feels it is on target to achieve its 2013 earnings guidance range of $4.25 to $4.45 per share.
Looking beyond 2015
Duke's long-term fortunes will be based largely on its ability to optimize the performance of its nuclear fleet, as well as continue to successfully integrate the acquisition of Progress Energy. That first item won't necessarily be easy, as nuclear has proven to be a tough business this year, even for well-managed utilities.
Indeed, Duke Energy believes one of its biggest headwinds in the fourth quarter will be further nuclear outages and the associated costs. Duke has already taken $57 million in nuclear development charges year to date, so this is one area investors should closely monitor.
As further evidence of the troubles facing nuclear energy, consider the struggles of Exelon (NYSE:EXC), the largest owner and operator of nuclear plants in the United States. Nuclear is proving to be extremely expensive to build out, and Exelon's volatile results over the past year bear this out.
Exelon posted a net loss in the first quarter, and its second quarter saw profits fall 13%, versus the second quarter of 2012. Thankfully, Exelon did show measurable improvement in the most recent quarter -- namely, increased nuclear capacity and improved margins -- which helped it keep earnings afloat.
The bottom line
Duke's road is not without a few speed bumps. Unfavorable weather always has the potential to take a bite out of earnings, and nuclear will be a challenge. At the same time, due to its diversified business and track record of growth, I'm not worried. The company has set reasonable goals for itself over the medium and long-term that are entirely attainable, thanks to its skilled management team.
In addition, Duke has placed great emphasis on providing shareholders with cash returns. The company has pledged to pay at least 65% of its adjusted earnings to shareholders in the form of a hefty dividend, which yields 4.3% at recent prices. As a result, income investors interested in the utility sector should definitely give Duke Energy some consideration.
Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Exelon. 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.