Duke Energy: Industry Selloff Provides Opportunity to Pick Up Duke at a Discount

After announcing plans earlier this week to divest its commercial renewable energy business, Duke DUK will become a fully regulated utility with a clear pathway to achieving management’s 5% to 7% earnings growth target. Duke Energy is the third cheapest utility on our sector coverage list as of mid-June, trading at a 13% discount to our $105 per share fair value estimate. Last August, Duke traded at an 11% premium to our fair value estimate. Duke’s 4.4% yield is among the highest in the sector and a 70-basis-point premium to the sector median. Given Duke’s higher payout ratio, we expect dividend growth to lag earnings growth.

Duke’s $65 billion capital investment plan for 2023-27, which is focused on clean energy and infrastructure upgrades, supports our expectations for Duke Energy to earn at the midpoint of its earnings target range. In North Carolina, Duke’s most important jurisdiction, regulation has improved significantly through new legislation. The legislation supports utilities playing a critical role in the state’s clean energy transition while also allowing for multiyear rate plans, including rate increases for projected capital investments.

Florida continues to be a source of growth for Duke, supported by industry-leading regulation; and Indiana’s 20-year integrated resource plan calls for significant renewable and energy storage builds. Across its subsidiaries, management is expecting the need to spend $80 billion-$85 billion of capital expenditures beyond its current five-year plan, creating a long runway of growth opportunities.

With the company transforming to a pure-play regulated utility, management must now work on executing its aggressive capital investment plan across all its subsidiaries and deliver on its earnings target—which management had difficulty achieving in the past, in most part due to the company’s unregulated operations.