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Will Duke Energy Help You Retire Rich?

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Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Utilities have traditionally been excellent plays for conservative investors seeking healthy dividend income. But in recent years, the character of the utility business has changed dramatically, and you can no longer assume that utilities are slow-growth stalwarts. For instance, Duke Energy (NYSE: DUK  ) has recently made a huge acquisition to gain competitive advantages, but has the company bitten off more than it can chew? Let's revisit how Duke Energy does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Duke Energy.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$46.1 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

3 years

Fail

 

Free cash flow growth > 0% in at least four of past five years

1 year

Fail

Stock stability

Beta < 0.9

0.33

Pass

 

Worst loss in past five years no greater than 20%

(21.7%)

Fail

Valuation

Normalized P/E < 18

16.89

Pass

Dividends

Current yield > 2%

4.7%

Pass

 

5-year dividend growth > 10%

3%

Fail

 

Streak of dividend increases >= 10 years

8 years

Fail

 

Payout ratio < 75%

89.5%

Fail

       
 

Total score

 

4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Duke Energy last year, the company has lost 2 points, with declining revenue and climbing payout ratios costing it in the score column. Shareholders have also seen their gains held in check, with less than a 10% pop in the stock over the past year.

Duke Energy has taken advantage of as many of the prevailing trends in the utility industry as it can. By doing everything from boosting margins by paying lower prices for natural gas and coal to becoming a leader in renewable energy production from wind, solar, and hydroelectric power second only to NextEra Energy (NYSE: NEE  ) , Duke has diversified itself to a much greater extent than many of its peers.

Duke is clearly betting on low gas prices to continue. Just as Southern (NYSE: SO  ) plans to use more gas than coal this year for the first time ever, Duke is retiring coal-fired power plants and replacing them with plants using natural gas. American Electric Power (NYSE: AEP  ) , which is the biggest coal user in the nation, expects its coal consumption to drop significantly in the next three years, and even Exelon (NYSE: EXC  ) , which is famous for its nuclear power generation capacity, expects to get two-thirds of its fossil-fuel power production from gas in the near future.

However, Duke had to deal with unexpected turbulence when it finally closed on its merger with Progress Energy in July. According to current Duke CEO Jim Rogers, at the last minute, Progress CEO Bill Johnson, who had been pegged to lead the merged companies going forward, was ousted by the Duke board after the deal was completed. Even now, investigations are still ongoing, and some believe that foul play may call the entire merger into question before all is said and done.

For retirees and other conservative investors, Duke's dividend and stable stock are attractive signs for a prospective retirement stock. Yet with fallout from the Progress merger continue to hang over the company's head, you may prefer to wait until the storm clouds subside before adding it to your retirement portfolio.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

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Add Duke Energy to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger and The Motley Fool have no positions in the stocks mentioned above. Motley Fool newsletter services recommend Exelon and Southern. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


Read/Post Comments (1) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 22, 2012, at 11:47 PM, GETRICHSLOW2 wrote:

    I would not touch DUK with the crook of a CEO they have.

    Some great long term utiltiies for retires would be PEG, SO, EXC.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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