Source: Duke Energy Corp; Barclays CEO Energy-Power Conference
Duke Energy Corp (DUK 2.41%) is making its biggest moves since its 2012 merger. With income investors wondering where their dividend is headed, CEO Lynn Good took the stand earlier this month to tell shareholders everything they need to know. Here are the five biggest takeaways from her speech.
1. Expect growth ahead
Five sentences into her 20-minute speech at the Barclays CEO Energy-Power Conference, CEO Lynn Good was already looking ahead. Good's statement: "We're off to a great [2014] start and we have an opportunity today to spend some time on growth" paved the way for a conversation about future prospects, not past accomplishments.
While investors love growth, it's a fine line to balance for income investors. Steady earnings aren't easily ignored, but Good made clear that her expectations involve a little more risk for interested investors. And if those risks pay off, a lot more reward.
2. Steady as she grows
Although Duke's going for growth, Good made sure to assure investors that their investments are in safe hands. With 84% of the company's coming from regulated utilities, Duke Energy Corp can expect consistent return on equity ad infinitum. Not only did its 2012 merger with Progress Energy help Duke grow its regulated earnings, but it also spread them across six different regulated jurisdictions – a major win for diversifying and de-risking its earnings stream.
Source: Duke Energy Corp; Barclays CEO Energy-Power Conference
3. No more competition
Competitive businesses used to be utilities' wild cards, a chance for investors to win big while enjoying steady earnings. But a rollercoaster economic recovery, erratic natural gas prices, and new environmental policy has put many utilities' competitive assets in a tough spot.
In February, Duke Energy Corp announced its intention to exit its merchant generation business. And in August, it revealed a $2.8 billion deal with Dynegy (NYSE: DYN) to make that dream a reality. Good noted in her presentation, "As we analyze this business and the volatile low returns, we did not see it as a long-term strategic fit to Duke Energy." Good also mentioned that Duke is considering using the proceeds for additional investment, a stock buyback, or relieving some of its holding company financing in expectation of more spending in years to come.
4. Pipelines in the pipeline
Pipelines are the hottest things to hit dividend stocks since MLP's (master limited partnerships). As natural gas becomes an increasingly large part of America's energy infrastructure, pipelines are the energy transmission lines of tomorrow. And for the companies that own those pipelines, they'll enjoy smooth and steady "toll booth" revenue as gas gets guzzled all around America.
For Duke, its announcement earlier this month that it would build a 550-mile Atlantic Coast pipeline served as a strong signal that it's not leaving pipelines to competitors. Stretching from West Virginia to North Carolina, Duke will partner with Dominion Resources (D 2.62%) and a couple other firms to make the $5 billion dream a reality.
Source: Duke Energy Corp; Barclays CEO Energy-Power Conference
5. Dividends, dividends, dividends
Duke Energy Corp. is undergoing a major renovation – but its dividend isn't going anywhere. With cash going in and out at record rates, Good assured income investors that their quarterly distributions aren't about to disappear. Duke has a 4% to 6% long-term growth and will be targeting dividend growth accordingly. With its current 4.4% yield well ahead of the average utility's already respectable 3.3%, that's excellent news for long-term investors.
Is Duke dynamite?
Duke Energy isn't your average utility. As Good made clear in her presentation, the utility is setting itself up for success – but its stock is priced accordingly. The road ahead may be rocky, and income investors need to take their "dividend blinders" off to ensure they're considering volatility in addition to value.
