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Investments In Renewable Energy One Reason Among Many For A Bullish View On Duke

Summary Company has accelerated efforts to get a large regulated asset base in order to secure long-term growth. DUK is investing heavily in its solar and gas-run operations. Company’s future cash flows will improve, which will back its dividend growth. Duke Energy (NYSE: DUK ) is a leading electric power company in the U.S. The company’s financial performance remains satisfactory, and it has been making aggressive efforts to further improve its performance. DUK’s constant efforts to better its financial numbers by making growth investments in renewable energy generation projects have placed it on a growth track. Given the correct growth efforts backed by its healthy capital investments, I expect DUK’s revenues, cash flows and earnings base will get better over time. Moreover, as the company’s future performance will improve, it will continue to share its success with shareholders in the form of cash returns, which will positively affect its stock price; the stock offers a dividend yield of 4.6%. DUK’s Efforts to strengthen its Power Generation Fleet In the recent past, the U.S. government has increased its efforts to lower carbon dioxide emission rate from energy generation fleets of utility companies by imposing heavy taxes and fines. In order to save themselves from taxes and the fine burden, utility companies have increased their focus on the expansion of renewable energy generation resources, such as solar, wind, geothermal, liquid biofuels and hydropower. Owing to the increase in scale of capital investments made by utility companies in renewable energy generation projects, the EIA projects that the U.S. renewable energy supply will steadily grow in the coming years, as shown in the chart below. (click to enlarge) Source: eia.gov As far as DUK is concerned, in the light of strict environmental regulations, the company like all other utility companies has started investing in the expansion of its renewable energy generation portfolio; year-to-date, DUK’s renewable business has attained a capacity of around 2000MW and it is making continuous strides to increase it further. In fact, the company is seeking all possible growth opportunities to increase its renewable energy generation capacity. DUK has recently filed two RFPs with Carolina state regulators; one of the RFP is to seek permission for running 53MW of utility solar capacity in the region, in order to ensure proper supply of energy to customers of the region, least by the end of 2016. And in a separate RFP, the company has mentioned that it is looking for a solar capacity of 5MW for the Shared Solar Program. DUK believes that the Shared Solar Program will be beneficial for those customers who can’t install solar panels in their homes, but still want to enjoy benefits of renewable energy resources. The deadline for approval of both RFPs is mid-October 2015; I believe that with the approval of these RFPs, the company’s process of adapting solar energy will speed up, and will help it meet the growing demand for energy in Florida. Moreover, the Indiana Utility Regulatory Commission has approved DUK’s 20-year purchase agreement to buy up to 20MW of energy from two solar developers in Indiana. Given the fact that solar projects are part of the company’s regulated asset base, I believe that by investing in its solar asset base, DUK will be able to file regular rate increase cases with regulators, which will ultimately better its future revenues, cash flows and earnings base. And as far as its gas-based energy generation operations are concerned, being an important part of its regulated asset base, the company has been making capital investments in its gas-based operations. DUK had previously filed an application to acquire 599MW of combined cycle-gas plant from Calpine, in Florida, which was recently approved by the FERC. Also, the company has announced the acquisition of a 7.5% stake in Sabal Trail gas pipeline for $225 million; with the commencement of its operation by the end of 2017, the Sabal Trail pipeline will serve DUK’s 1640MW Citrus County combined-cycle gas plant, which will begin its operations in 2018. Moreover, the company had announced $1.1 billion Western Carolina Modernization project in 2Q’15, under which coal plants in Asheville will be soon retire and will be replaced with a new 650MW combined gas plant. Moreover, the project will positively affect the company’s performance, as the electricity generated from the combined gas plant will be 35% less expensive than traditional coal plants. I believe that all of the abovementioned investments by DUK for the expansion of gas operations will serve as an important source of generating strong and stable revenues and cash flows in the years ahead. Furthermore, the company has given an update on its plan to excavate coal ash basins in North Carolina in the 2Q’15 earnings conference call; according to the announcement, 12 additional coal ash basins will be removed in North Carolina, which brings the total number of ash basins to be removed to 24. DUK’s management has estimated that additional cost to close these basins will remain in a range of $700 million to $1 billion; however, the timing for incurring this cost has not been announced yet, which perhaps the company’s management will announce in 3Q’15. I recommend investors to wait for the upcoming call to get a clear picture on this issue. Investors Remain rewarded at DUK The company has a promising history of making regular cash returns to its shareholders. As a matter of fact, DUK’s wider regulated asset base helps the company generate stable cash flows. The company recently raised its quarterly dividend by 3.8% to $3.30 share and the stock currently offers a dividend yield of 4.60% , well above the industry average of 4%. I believe that the company will continue to increase its dividends at a healthy pace, which will portend well for the stock price. Given the strength of DUK’s strategic growth investments, analysts are also expecting consistent growth in the company’s book value per share and cash flow per share, in 2016 and 2017, as shown in the chart below. (click to enlarge) Source: 4-Traders.com Price Target I have calculated a price target of $76 for DUK, using dividend discounting method. In my price target calculation, I have used cost of equity of 7.3% and nominal growth rate of 4%. Based on the target price, the stock offers a potential price appreciation of 8%.   2015 2016 2017 Terminal Value DPS (In-$) 2.91 3.01 3.52 84.2 Present Value Of DPS (In-$) 2.7 2.6 2.85 68 Source: Equity Watch Calculations & Estimates Total present value of DPS = Price Target = $2.7 + $2.6 + $2.85 + 68 = $76/share Risks The company continues to face the risk of changes in regulatory restrictions. Also, the challenging Brazilian business environment remains an overhang on DUK’s earnings growth potentials due to the company’s international business operations. In addition, any laxness exhibited by the company’s management during the execution of its strategic growth plan will result in failure to grow sales as expected. Furthermore, unforeseen negative economic changes, foreign currency headwinds and growing carbon dioxide emission-related charges are key risks that might hamper DUK’s future stock price performance. Conclusion I reaffirm my bullish stance on DUK; the company has accelerated its efforts to get a large regulated asset base in order to secure its long-term growth. In this regard, DUK is investing heavily in its solar and gas-run operations, which portrays a positive picture of the company’s future sales, cash flows and earnings growth. Given the strong growth potentials, I believe the company’s future cash flows will improve, which will back its dividend growth. Also, analysts have projected a healthy next five-years earnings growth rate of 4.67% for DUK, as shown in the chart below. (click to enlarge) Source: Nasdaq.com Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Low Blow – Why Low-Volatility ETFs Could Prove Anything But When You Really Need Them To Be

By Ian Kelly Just as nobody buys a parachute primarily for its colour – well, certainly not twice – presumably the main reason investors choose to buy low-volatility exchange-traded funds (ETFs) is safety-related. If they really were looking for a smoother ride from the share prices of their underlying holdings, though, events in global markets over the last few days may well have come as a considerable shock. Low-volatility stocks have enjoyed a good run in recent years, and as is often the way with investment, the better an asset or sector performs, the more people want a piece of the action. The low-volatility ETF market is now considerable – to pick out one example, the PowerShares offering that tracks the S&P 500 Low Volatility Index (NYSEARCA: SPLV ) has attracted almost £3bn from investors since its launch in May 2011. If pushed on why low-volatility stocks have done so well, here on The Value Perspective, we would raise the possibility they were priced very cheaply at the start of their run. In a previous article, ” Lost and pounds “, for example, we reminded you how lowly valued tobacco stocks used to be as the market fretted over, among other things, huge threats of litigation. Then, as those fears largely receded, the shares re-rated. Once a group of stocks reach “fair value”, however, the only way they can continue to outperform the rest of the market is if they grow their earnings more quickly. Where we would take some convincing then is that there is any reason why a business would be able to grow its earnings faster over the longer term just because its share price happens to bounce around a little less than the wider market does. In other words, while a low-volatility strategy has worked in the past, we have our doubts as to whether it will to continue to do so. Where we have few doubts, however, is that many people will have been shocked over the last few days by just how volatile their low-volatility ETFs have proved since the global markets went into free fall over concerns about China. The following chart shows how the aforementioned S&P 500 Low Volatility ETF traded versus the whole S&P 500 on Friday, August 21. While we would not normally focus on intra-day pricing on The Value Perspective, when a low-volatility ETF at one point plummets 46% as its wider benchmark drops just 7% – while trading real volumes on those numbers – we are prepared to make an exception. (click to enlarge) (Source: Bloomberg, August 2015) (click to enlarge) (Source: Bloomberg, August 2015) A good lesson to take from this is the importance of, as it were, looking under the bonnet of any collective investment so you are comfortable with the sort of businesses you own through it. Anyone “popping the hood” of the S&P 500 Low Volatility Index, for example, would find an allocation of almost 15% to insurance companies and a further 13% to real estate investment trusts. Is there any great reason why the valuations of these stocks should not be volatile over time, or in the case of insurance, the businesses themselves should not be volatile? If you accept that the valuations of these businesses and their earnings are likely to be volatile, you might ask what are they doing making up more than a quarter of a low-volatility benchmark? The answer lies in the fact that these kinds of indices, and the funds that track them, are mechanistic in nature. Thus, the S&P 500 Low Volatility Index is set up to measure the performance of the 100 least volatile stocks of the S&P 500, with volatility defined as “the standard deviation of the security computed using the daily price returns over 252 trading days”. It may seem odd for the index to have a 15% allocation to insurance companies today, but over time, ideas such as low volatility can become self-fulfilling. There will be times when this sort of strategy works and times when it does not. But you only ever get what the market is willing to pay, and at one point on August 21, for low volatility, that was half what it was the day before. To our minds, owning a low-volatility investment that fails to provide it when it is really needed is akin to a pretty-coloured parachute which doesn’t open when you pull the cord.

Duke Energy Is A Good Play In This Volatile Market

Duke Energy is an electric power holding company whose stock is a low-risk investment. Despite its poor return on equity, Duke Energy has strengths that will continue to make it a reliable dividend stock. The company has performed poorly during the most recent quarter, but this is expected to improve. Duke Energy Corporation (NYSE: DUK ) is the largest electric power holding company in the United States and it is expected to stand firm in the electric utilities industry. Recently, the company has underperformed the industry average in many respects, causing its stock price to decrease from $89 to $70 within the past half year. However, an improvement in both company performance and market performance is anticipated. Duke Energy’s faults may currently overshadow its strengths, so it is important to dig deeper into the company’s operations and history before making a decision to buy. Insider Monkey shows that Luminus Management held onto about 1.68 million shares of DUK after decreasing its position by 22%. Seminole Capital’s position in DUK was slightly higher with 630,534 shares, while Highbridge Capital added a new position of 350,000 shares in DUK. We follow these funds because as Insider Monkey shows ( read the details here ), they have a penchant for making good long picks, but their short picks usually eat into their overall returns. In total, Insider Monkey showed five funds adding new positions in the shares of DUK and ten exiting their stakes. We think those funds staying long will not regret their decisions. Duke Energy has struggled with a YTD return of -12.19% even though its shares outstanding have decreased by 2.8% in the same time. The company’s gross margin of 42% exceeds the industry average, but its revenue has decreased over the past year, and in turn, DUK’s EPS has hit a recent low of $3.46. These disappointing statistics are troubling to investors, but there is plenty of reason to still consider DUK as a worthy investment. While many have lost faith in Duke Energy as of the most recent quarter, the company remains poised to reaffirm its reputation and generate a steady source of income for its shareholders. As the largest electric holding company in the country, Duke Energy has shown that its strengths will continue to make it an attractive opportunity for investors. With $120 billion or more in operating assets and nearly 8 million customer relationships , the company can ensure consistent operating cash flows and dividends. Its dividend yield is currently 4.49%. Slumping performance metrics are expected to improve in the near future as well. According to TheStreet , the market expects EPS to increase by $1.00 in the next year. With this may come a decrease in P/E ratio all else equal, meaning DUK may be undervalued considering its forecasted EPS. Additionally, NASDAQ shows DUK will realize earnings growth of 2.4% on a year-end basis and 5.28% by the end of 2016. DUK is known for its relatively consistent cash flows, but an improvement in performance may also be around the corner. Perhaps most important to investors, DUK is a low-risk stock, even compared to most other dividend stocks with an ultra-low beta of 0.35 on a 5-year basis. Its generally consistent performance is why the dividend has increased every year and the yield now stands at 4.5%. DUK remains an attractive option for risk-averse investors in that they have generated predictable cash flows through out their 150+ year existence, and its stock’s fortunes are not entirely tied to the market and the company’s fortunes are not entirely tied to the economy. Duke Energy’s two biggest direct competitors, American Electric Power Company (NYSE: AEP ) and CenterPoint Energy (NYSE: CNP ), have underperformed even more so than DUK. According to Yahoo Finance , AEP and CNP trail DUK in quarterly revenue growth, gross margins, operating margins, and EPS. The electric utilities industry in aggregate, however, has outperformed DUK in terms of quarterly revenue growth, perhaps due to the emergence of utility-scale solar developers. Otherwise, DUK seems to be in a far better position than its two largest direct competitors and the electric utilities industry as a whole. Duke Energy is a low-risk stock that may not offer grand price appreciation, but the company can provide shareholders with a steady source of income through dividends. Its position in the electric utilities industry, including its enormous portfolio of operating assets, allows cash flows to remain relatively predictable. Despite the disappointment surrounding recent performance metrics, DUK is still a reliable investment opportunity and can provide some stability in an increasingly volatile market. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.