Is It Time to Buy Duke Energy Corp?

Source: Duke Energy Corp. 

Duke Energy Corp (DUK 0.77%) has been making major moves lately. With a newly proposed pipeline and a new focus on natural gas generation, Duke Energy will soon be a different dividend stock than it is today. Let's look at two important metrics and then fill out the context to decide whether Duke Energy Corp is a buy today.

Price-to-cash flow ratio
As a utility dividend stock, there are a few metrics investors need to keep in mind.

On the valuation front, the ever lauded price-to-earnings (P/E) ratio isn't the most important number to watch. Utilities are financial behemoths, and "earnings" can vary widely as accounts push and pull numbers. It's more useful to examine price-to-cash flow ratios, since cash flow makes the monster move. Let's see how Duke Energy Corp stacks up against some of its competitors:

Source: E*TRADE.com.

The Southern Company (SO 0.90%) and Exelon Corporation (EXC 0.56%) are some of the biggest utilities around. But as you can see, no one's cash is priced as prettily as Duke Energy's. The Southern Company is a close runner-up, with a ratio of 8.35, but Exelon Corporation's 4.74 is a clear signal that there's more to a dividend stock than cash flow alone.

Dividend yield
For better or worse, Duke Energy Corp is a dividend stock. Regardless of its business, investors will buy or sell Duke based solely on its distribution decisions. Here's how Duke Energy's current dividend yield compares to a couple similar dividend stocks:

Source: Yahoo! Finance.

Against The Southern Company and Exelon Corporation, Duke Energy Corp falls smack-dab in the middle – and that's a good thing. Dividend yields are the apple of income investors' eyes, but an overly optimistic distribution can put a company in a financial pinch. On the other hand, a small dividend means less guaranteed quarterly cash -- a major no-no for dividend stocks.

According to CEO Lynn Good, Duke is targeting 4% to 6% long-term earnings growth and plans to keep upping its dividend at a similar rate. As evidenced by the "dividend staircase" below, Duke Energy has a long history of doling out dividends -- and it seems that isn't about to stop. 

Beyond the numbers
Duke Energy Corp is undergoing a major renovation. After an initial "intent-to-sell" press release in February, Duke officially announced in August that it would sell its merchant generation business to Dynegy (NYSE: DYN) for $2.8 billion. CEO Good made clear that Duke didn't see a place for the "volatile low returns" it's recently experienced. 

Au contraire, Duke Energy is looking elsewhere for growth. Most notably, the company has been closing down coal-fired power plants and investing in natural gas plants, pipelines, and renewable energy. In the past three years, Duke has shuttered 3,836 MW of old coal plants, with another 2,466 MW on the chopping block for the next four years. 

At the same time, it's added on 2,760 MW in natural gas generation capacity in the last two years alone. And while renewables generation still pales in comparison, Duke has spent a sizable $3 billion on more than 1,000 MW of wind and solar projects since 2007.

Duke's also got a few proposed megaprojects up its sleeve that, if approved, could stir things up even more. A Southeast natural gas pipeline would expand Duke Energy's natural gas infrastructure, and a proposed $8 billion wind power project for Los Angeles would forever change America's renewables energy perception.

Is Duke Energy a buy?
From the numbers alone, Duke Energy sends some mixed messages. Its cash doesn't come cheap, but its dividend is everything an investor could hope for.

On the non-numeric front, Duke has an exciting future planned out for itself. But plans are no more than plans, and investors should be prepared to swallow more volatility than they might with an Exelon Corporation or The Southern Company investment.

So, is Duke Energy Corp a buy? It depends on your risk aversion and appetite for growth. Its valuation isn't prohibitive, but this utility isn't exactly a dividend deal. If you're in it for the long haul and can handle a rockier road, Duke may be the stock for you. But if you prefer steadier (albeit smaller) growth, other dividend stocks may be better buys.