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Future Growth Opportunities For Duke Energy After Piedmont Acquisition

Duke Energy expands its reach from the electric utility industry into the natural gas business. Increases Duke Energy’s stake in very profitable Atlantic Coast Pipeline while tripling gas customers. Expect to see increased EPS for Duke Energy. By Matt De Jesus I have a strong buy recommendation for Duke Energy (NYSE: DUK ) after its acquisition of Piedmont Natural Gas. Duke Energy acquired Piedmont for $4.9 billion, and will also assume around $1.8 billion of its debt, representing an enterprise value of close to $6.7 billion for Piedmont. Duke Energy paid a 40% control premium on the acquisition, paying out Piedmont shareholders $60 in cash for each share outstanding. Reasons they paid this high premium are related to the possible synergies related to the deal. This acquisition is a good deal for Duke Energy, as they try to grow in the utilities industry and possibly expand nation wide. Duke Energy is the largest electric power holding company is the country, and is headquartered in Charlotte, N.C. Before acquiring Piedmont, Duke Energy was known for producing electricity, and not a big name in the gas industry. However, with the electricity industry showing signs of stagnant growth, Duke Energy wanted a piece of Piedmont Natural Gas for a couple of reasons. First, the natural gas industry is growing, whereas the electricity industry is not. Utilities are going through a period right now where natural growth is slow, so companies, like Duke Energy, must grow through acquisitions. The natural gas market, according to Wall Street analysts, is bullish right now, so everyone is trying to get into the gas business, adding significance to Piedmont’s acquisition. They will receive all of Piedmont’s existing customers, thus tripling its number of natural gas customers from 500,000 to 1.5 million. Also, with Duke’s established brand and stake across the southeast, I expect these numbers to grow further. The second reason Duke Energy acquired Piedmont was because of the Atlantic Coast Pipeline. Now owning Piedmont, Duke Energy increases its stake in the $5 billion Atlantic Coast Pipeline to 50%. More importantly, because of the state regulations on Piedmont’s fuel delivery incorporated with the pipeline, the acquisition provides Duke Energy with a steady and predictable profit, which is very important in the utility industry. Much of a utility companies growth is based on a rate base, which is the value of property on which a public utility is permitted to earn a specified rate of return. So, utility companies make money off returns on investments in property for the company. This is why the regulated returns on the Atlantic Coast Pipeline are so important, as they are consistent and profitable. Third, the move is in line with the company’s possible plans to grow throughout the U.S. and not just stay in the Carolina, southeast area. By establishing itself in the gas industry, Duke is scaling itself for the long-term next step in its growth, which may be to take the company nationwide. This move would not be any time in the near future, as Duke must first establish itself in the gas industry. Some may question Duke Energy’s paying such a high control premium to buy out Piedmont, but in the long run, this is a great deal for the company. The deal enhances Duke’s forecast EPS rate of 4% to 6%. To give some perspective, Piedmont’s rate base and EBITDA have been rising annually at about 9%. Duke’s stock price is currently at $67.32, and has been down recently because of the debt involved with the deal and slowed growth in the electric utility industry. The 52-week low on the stock is $67.07, with the high being $89.97. This deal, in the end, will be good for Duke, and it’s investors because it will enhance EPS. The stake in the Atlantic Coast Pipeline is very integral to this, and will provide regulated profit for the company even when the market for electricity is down. Also, the market for natural gas is bullish, and with a big company like Duke Energy providing natural gas, investors will reap the benefits of the profits Duke will make from Piedmont. We’ll see Duke Energy grow in these next months/year, but it will take some time before we see the major benefits from this deal.

SPHD: A Monthly Dividend ETF With A 3.5% Yield That Is Growing Stronger

Summary SPHD offers an excellent dividend yield of 3.5% with monthly payments. The ETF has a moderate expense ratio. The sector allocations look great and the volatility over the last few years has been lower than the domestic equity market. The PowerShares S&P 500 High Dividend Portfolio ETF (NYSEARCA: SPHD ) looks great. After readers suggested I take a look at the portfolio, I decided it was time to dive inside and see what I could find. This is a very solid ETF. Investors may quibble on whether the allocations are perfectly or merely good, but there is far more to like than to hold against the fund. As you’ll see in the article, I find the sector allocation to be a bigger selling point than the individual holdings. Expenses The expense ratio is a .30%. This is fairly mediocre for expense ratios in my estimation, but there have been quite a few funds coming up lately with expense rates that are downright excellent. Dividend Yield The dividend yield is currently running 3.50%. For the investor that wants a very strong dividend yield to support them in retirement, this should certainly qualify. Investors can create a stronger yield by selecting individual companies, but they are creating a high yield portfolio that is exposed to substantial risk of dividend cuts when they allocate aggressively to companies that are yielding materially higher than this portfolio. There are two other things to like about the dividend here. One is that the dividend is paid out on a monthly basis which many investors appreciate because it is easier for them to plan around. The other is that the 3.5% dividend yield is based on trailing dividends rather than forward dividends and the dividends have been moving slightly higher over the last year. The dividend went from around 9 and a half cents per month to over 10 cents per month. Holdings I grabbed the following chart to demonstrate the weight of the top 10 holdings: Seeing AT&T (NYSE: T ) and Verizon (NYSE: VZ ) with medium weights is one area where I tend to feel conflicted. Investors won’t see the Verizon in the chart, but I rarely find ETFs that only hold one. When I checked the rest of the holdings I found Verizon was represented with 2.22% of the portfolio. The dividend yields are great but the sector is becoming more competitive. On the upside any technology that actually makes them obsolete or at least incapable of growing earnings would be indicative of the investor having a lower cell phone bill, so there is another benefit to aligning the portfolio to match an investor’s individual expenditures. Honestly, is there any better way to pay your phone bill than with a dividend check from the phone company? This is a difficult one to come down on because I love the strategy of covering a cost with dividend income from the company, but I’m also concerned that Sprint (NYSE: S ) is offering a very viable competitive product. Their reception may be terrible in some cities, but they are great in Colorado Springs. Since the allocations are less than 5% of the portfolio combined, I think the representation here is pretty reasonable. I also see Realty Income Corp (NYSE: O ) as an easy choice for investors looking for solid growth in income. The triple net lease REIT has an excellent history of raising dividends. They pay their dividends monthly and have raised the dividend 81 times already. They have done an incredible job of executing their investment strategy and it is simpler than it seems. The REIT enters into net lease operations where the tenant is paying most of the operating costs. Realty Income Corporation is acting as an alternative format of financing for their tenant. Their strategy is so successful that they have been acquiring over a billion dollars in real estate each of the last few years. They already acquired almost a billion dollars in real estate in 2015. Sectors Heavy allocation to utilities makes sense for an equity fund seeking lower total volatility levels. The utility companies have a tendency to be partially correlated to equity and partially correlated to bonds which creates a method for a pure equity ETF to reduce volatility by incorporating some exposure that is very similar to bonds. For investors with a diversified portfolio, that means this fund may not get as large of a benefit from being combined with treasuries and other long duration bonds as a total market portfolio would get. Regardless, with investors needing stronger yields in retirement and often going light on bonds in favor of equity, this would be a more rational allocation model than simply going with full market exposure. The allocation to financials provides the shareholders with exposure to REITs that would fall with utilities when rates go up, but it also gives them access to banks that would benefit from higher rates paid on excess reserves. The combination works fairly well to create a portfolio with lower volatility. The heavy allocations to consumer staples also makes sense in that context since consumer staples tend to be a solid sector for taking smaller losses during a recession. I was a little curious about their decision to put 10% into industrials, but when I looked at the individual holdings for the sector it made sense. While General Electric (NYSE: GE ) is seeing their share prices just getting back to where they before the crash, their still offer a sold 3% yield. Volatility Measured since October 2012, this fund has demonstrated annualized volatility of 10.9% compared to 12.6% for the S&P 500. The beta on the fund has been a mere .75. While the fund has not kept up with the S&P 500, it is a very attractive allocation strategy with the market at fairly high valuation levels. For the investor that would like to reduce their risk and is willing to accept a lower long term projected return, this fund fits the bill. If market prices had fallen by 40%, I would try to look at more aggressive allocations. When prices still seem high, I prefer using defensive allocations and this fund offers a great deal of them. Conclusion All around this looks like a solid fund. The only thing I can find not to be excited about is the expense ratio. Even there, the ratio isn’t terrible. It is simply higher than what I am used to paying as I favor the Vanguard and Schwab ETFs. If this fund got larger and dropped the expense ratio, it would be absolutely excellent. I think that might be a viable option for the fund’s sponsor as well since the strong yield and monthly payment with a low expense ratio would create enough demand to warrant significantly more shares of this ETF being created.

Suburban Propane Partners Q4 Earnings Review: Good Performance Despite Higher Losses

Summary Operating loss increased from $34 million to $48 million. Integration costs and pension charges skewed results. Earnings should improve once these charges are eliminated. It’s been a week since Suburban Propane Partners (NYSE: SPH ) reported Q4 earnings, and the market remained neutral. Despite declining revenue and $48 million in operating loss, I believe that results were fantastic. Let me tell you why. As with many other natural gas related companies, sales suffered, dropping from $241 million to $174 million. The difference between this revenue decline and say a midstream company with POP contracts is that a lot of the company’s costs are variable. As the result of lower commodity prices, the company was actually able to increase the gross margin from 50% last year to 67%. This is a phenomenon that is common among refiners as well. What about the net loss? After all, the company did report an operating loss of $48 million. I would like to remind readers that the propane business is highly seasonal, and losses during warmer months are expected. (see below) As mentioned in my previous article , the company sells around two-thirds of retail volume from October to March, so the goal during hotter months is really to minimize loss. Unfortunately, the company does not seem to have accomplished that goal, as Q4’s operating loss of $48 million was higher than Q4 2014’s loss by 39%. However, there were multiple one-time costs that hurt Q4 results. First there is the integration cost. As mentioned in the previous article, the company acquired Inergy in 2012, and the integration process was still in progress in Q4 2015. During the quarter, the company spent $6.4 million on integration costs versus $3.2 million last year. This may be alarming since it would appear that integration costs are ramping up as opposed to going down. However, the management stated that the integration process was essentially complete, leading me to believe to that this cost increase is related to the “final push” as the company wraps up everything. Going forward, I expect integration costs to decline significantly or be eliminated. In addition to the integration costs, the company also had two pension related charges. First there was $11.3 million relating to the company’s partial withdrawal from a pension plan covering some former Inergy employees, which will save the company money later. If we account for these one-time charges, operating loss would actually decrease $30 million, which would be a 3% improvement from Q4 2014’s adjusted loss of $31 million. Keep in mind that the company was able to achieve this result despite the warmer weathers that we’ve been experiencing. When we take the above factors into consideration, I think it’s clear that the company’s Q4 performance was very impressive. Takeaway Despite mounting losses, I believe that the company had a great quarter when we take one-time factors into account. When you invest in Suburban Propane Partners, there is always the risk of warmer weather. Unfortunately that is what we’ve experienced in Q4, but that is what makes Q4 performance even more impressive. Overall, I believe that the company will improve earnings going forward as it gets rid of the one-time charges.