Duke Energy Earnings: 3 Reasons This Dividend Stock Disappointed

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Duke Energy Corporation (DUK 0.01%) reported earnings yesterday, disappointing analysts with sub-par profit. But dividend stocks aren't always dynamite, and Duke's dip could be temporary. Let's take a look at three reasons why Duke Energy Corporation didn't deliver.

1. Rough residential sales
For Q4 2014, Duke Energy experienced a 2.2% decline in weather-normalized residential sales. As a regulated utility that gets more money by getting more customers, that's not something investors want to see. For the entire 2014 fiscal year, its 0.1% decline isn't as deep, but it's not the strong, positive growth investors want to see.

Duke noted that although it saw a 1% growth in its total number of customers, the average residential customer is using less energy. Energy efficiency initiatives and relatively more multi-family housing customers are contributing to cut energy bills. 

Overall, declining residential sales aren't necessarily a bad thing. Duke Energy Corporation also saw 1% growth in both commercial and industrial sales for 2014, and volatile demand is the true culprit. If Duke can do away with expensive power plants and downsize to new demand levels, it can still be a lean, mean dividend machine.

2. International businesses

Duke has gone and done it -- it's going where few multinational businesses have gone by repatriating $2.7 billion in earnings within the next eight years. The move coincided with Duke's decision to hold on to its international business assets, despite a $36 million earnings loss for Q4 2014. 

The unit currently accounts for about 10% of its overall business mix and, according to CEO Lynn Good, it's in shareholders' best interest for Duke to "continue to own, operate, and create value with the business." 

While Duke is strategically repatriating its $2.7 billion of bucks abroad in a tax-efficient manner, the company took a $373 million one-time hit this quarter to cover expected taxes.

While it remains to be seen whether Duke's international business is truly a dividend-dealing diversified asset or leftover baggage from its international expansion days, the repatriation of funds is good for shareholders. That amount of cash will help Duke strengthen its balance sheet and credit quality, as well as support growth investments and its seventh-year-straight dividend. 

3. Pricey power purchases

Source: Duke Energy Corporation. 

While Duke Energy Corporation eventually sells electricity to users, it has to produce or buy it first. In the U.S., its commercial segment business earnings came in $21 million below estimates at $109 million, primarily because of higher power purchase costs. Q1's polar vortex pushed prices higher, as did outages at Duke's Midwest generation fleet. In its international Brazil business, as well, Duke had to pay a pretty penny for power. Duke's hydroelectric dams were once again hit with unfavorable hydrology, an increasingly common trend. 

Power prices fluctuate, and Duke shouldn't be dinged for a quarter of above-average prices. It should, however, proactively pursue more stable energy generation sources. This past quarter, its renewables business delivered an unexpectedly large $60 million in earnings, potentially signaling additional investment opportunities in the quarters to come.

A dead dividend stock?
A residential sales slump, struggling international business, and expensive power all put Duke's dividend stock in a slump. But these profit problems are addressable, and Duke is already making some moves to deal with each issue. Investors will need to keep a close eye to ensure this dividend stock is keeping up a profitable pace in 2015 and beyond.