Shares of Duke Energy
At one time, Duke Energy was famous for being the market's lowest volatility stock, routinely trading in a one-year range that spanned no more than five points. Not so this year. The stock is off more than 50% from its 52-week high of $41.35.
The market didn't take well to news that this year's earnings estimate was being reduced by nearly 20% to $1.95 to $2.05 versus the previous consensus of $2.46. Perhaps worse was the warning on next year's earnings, which the company now says will be flat with 2002 and off sharply from the previous consensus estimate of $2.61. Even this revised outlook for flat earnings assumes a somewhat tenuous "modest improvement in market conditions."
The company blamed the earnings miss on poor results in its energy trading division, a segment which has been in a slump ever since the collapse of Enron. "The young merchant energy sector has experienced both an extreme up cycle and an equally extreme down cycle," said CEO Richard Priory. In other words, getting into energy trading has been a mistake.
The issue now is Duke's massive debt load, which has increased dramatically over the past two years, from $13 billion at the end of 2000 to $22 billion presently. Nevertheless, the signal from the bond market is that this debt is fairly secure. According to Bloomberg, Duke's 6.25% coupon notes maturing in 2012 fell to $1,062 per $1,000 of face value from $1,078, pushing up the yield on the debt to 5.4% from 5.18%.
The bond market's muted reaction probably relates to some assurance in Duke's announced plan to sharply reduce next year's capital expenditures. The company also promised that it will be able to fund those expenditures with internally generated funds, including cash provided by operating activities and asset sales.
These plans appear to be sufficient for keeping the current dividend intact. The company stated, "While dividend decisions are made by the board of directors, our plans retain the current level of $1.10 per share per year." On a stock price of $19.85, that's a yield of 5.54%. Not bad compared to the current 10-year Treasury yield of 3.78%.
Even with the current tumult facing the company and the electrical industry as a whole, this conservatively managed company may deserve Fools' attention given the tasty dividend yield.