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Summary Company is taking correct strategic growth measures to ensure secure and sustainable earnings and cash flow growth. DUK can apply for strong rate cases in future due to its high growth investments. Long-term prospects of DUK seem bright due to accelerated growth investments. Company’s risk profile will improve given its measures to strengthen its regulated business. Duke Energy (NYSE: DUK ) is one of the leading electric utility companies in the U.S., which supplies energy to North America using an extensive portfolio of electricity generation assets. The company is regularly using a major portion of its growth investments on expanding its renewable regulated asset base by making regular acquisitions and by pursuing several appealing construction projects, under its attractive business strategy that focuses on having large regulated business mix. DUK’s ongoing capital expenditure will keep its rate base growing, above or in line with the management’s forecasted range, which will boost its long-term earnings and cash flow growth. Given the company’s on-track, strong long-term strategic growth measures, I think income-hunting investors should consider adding DUK to their dividend portfolios. Electricity consumption in the U.S. has been growing at a modest rate. The graph below reflects EIA projections for U.S. electricity consumption in 2016. Source: eia.gov To strengthen their electricity generation portfolio and to keep up with the changing environmental regulations, U.S. utility companies are trying to maximize opportunities of growth, while managing risk by intelligently shifting towards the regulated business side, which will provide stability to their cash flows and earnings. Speaking of DUK, the company has also followed industry norms by increasing its dependence on the regulated business side, which has been a very strong performer. DUK now expects regulated and commercial business to grow by 4%-6% . The company’s plan to have a larger regulated business mix through active acquisitions and through several construction-related projects, is working really well. DUK has built a strong portfolio of approximately 2000MW of owned and equity interest in both wind and solar projects. Speaking of the solar side of its renewable regulated business side, the company is systematically and strategically growing its solar energy-based electricity generation asset base. In North Carolina, where DUK already operates with 13 solar farms, the announcement for the construction of the biggest solar energy generation farm of 40MW , in collaboration with First Solar (NASDAQ: FSLR ), has been announced. Moreover, the company plans to complete the construction of 128MW utility-scaled solar operations in North Carolina. Additionally, DUK’s solar-based investments in South Carolina and Florida are advancing well with the plan. I think the company will benefit from its ongoing investments in the Carolinas by filing rate cases in upcoming years, which will bode well for its EPS and cash flow growth. The company is planning to make its renewable energy generation portfolio stronger, by agreeing on a $4.75 billion deal agreement with Piedmont Natural Gas (NYSE: PNY ). DUK’s management expects that the acquisition of PNY’s assets will be accretive to its earnings base in the first year, after the closure of the deal; the deal will add approximately 50bps to long-term EPS growth. The company is expecting benefit from robust rate base growth of around 9% from this acquisition, which will accelerate DUK’s sales and cash flow base and will ultimately increase its growth rate beyond the given guidance of 4%-to-6%. Moreover, the company has recently acquired a 50% stake in Mesquite Creek via Sumitomo joint venture, to acquire 211MW wind power project, upside of this deal rests in enhancing DUK’s energy generation capacity; also the deal has moved it a step towards achieving its goal of becoming carbon neutral by 2020. Taking another smart move towards achieving carbon neutrality goal, the company has announced the retirement of its Ashville coal plant in N.C. and its replacement with two 280MW CCGTs in 2020, with an expected investment of above $1 billion, the project might add as much as $0.05-to-$0.08 towards DUK’s EPS. Besides these acquisitions and constructions, there are a number of commercial wind and solar power projects planned by the company, which are likely to come in operation by the end of the year. In total, the company’s growth investments is expected to be $20 billion through 2019 and offer the base for strong earnings growth in the years ahead. Furthermore, DUK’s international business, which has been facing some challenges lately have stabilized in 2015. Given the fact that analysts are expecting lower market power crisis and higher energy demand from key international markets like Brazil, amid positive changes expected in the weather, I think the company’s international business will witness modest growth in 2016 and beyond. Furthermore, DUK has an attractive capital return plan, which is largely supported by its strong cash flows. The company has paid dividends for 89 consecutive years. Talking about DUK’s future dividend payments plans at the 3Q 2015 earnings conference call, its CEO said : We have made significant progress in advancing our strategic growth initiatives, both in our regulated and commercial businesses providing strong support for our long-term earnings growth objective. Our objective is to grow dividend annually at a rate consistent with our long-term’s earnings growth objectives. In the near term, our payout ratio will trend slightly above 70%. The company currently offers an attractive dividend yield of 4.85% . Moving ahead, as DUK’s strong growth prospect initiatives will positively affect its cash flows, I expect to see uninterrupted dividend payments for shareholders, which I believe will bode well for the stock valuation, as investor confidence will increase. Summation The company is taking the correct strategic growth measures to ensure secure and sustainable earnings and cash flow growth. DUK has won the ability to apply for strong rate cases in future due to its high growth investments to get an extended portfolio of regulated renewable energy generation asset base, which will have positive impact on its future financial performance and on the stock valuation. Given the accelerated growth investments, the long-term prospect of DUK seems bright. Also, the company’s risk profile will improve given its measures to strengthen its regulated business. Therefore, I think DUK is an attractive investment prospect for income-hunting investors. Scalper1 News
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