The following audio is from a conference call that will begin on January 27, 2015 at 09:00 AM ET. The audio will stream live while the call is active, and can be replayed upon its completion. Now that you’ve read this, are you Bullish or Bearish on ? Bullish Bearish Sentiment on ( ) Thanks for sharing your thoughts. Why are you ? Submit & View Results Skip to results » Share this article with a colleague
The company recently raised its dividend 100%. The company offers exposure to a lot of different markets. Growth is looking to get back on track and shares look undervalued. It expects to increase the dividend by 10% annually for the next few years. As I not only look to add higher yield plays to my portfolio but also better diversify I came upon AES Corporation (NYSE: AES ). The company meets both of these criteria and I think the shares look quite attractive here. Long-term I think the company is fairly safe play and has a good story going forward. AES is a global power company that through its various units operates, and delivers power in 19 different countries. Below is a map of its countries of operation and also the units in which they divide the business by. (The units are marked with the pin) ( click to enlarge) (Source: AES website ) The company has exposure to a lot of different markets, which can most definitely be seen as a good thing, but also as a bad thing. Its good because it’s very diversified, gives opportunity for more growth, and offers protection from specific market issues. The bad would be that exchange rates can hurt it easily, and instability risks are also prevalent in emerging markets. The company does have a risk management program when it comes to currency and utilize hedges to combat fluctuations effecting the company drastically. As it can be seen the company operates in several emerging markets which I think is great for future growth and makes it a great diversification play. The first thing that catches the eye is the company’s great yield. On December 15th the company announced a 100% increase of its dividend marking its second increase since bringing it back. I see this as a big step as it gets a trend of dividend growth going. It brought the dividend back in late 2012 and has grown it from 4 cents quarterly to currently 10 cents quarterly. Why I like this dividend even more is the fact the payout ratio is just 31%. With an annual dividend of 40 cents the shares currently yield over 3% and I believe in the future the company will be able to raise it further. In fact in its most recent presentation it says that it expects to increase the dividend 10% annually until at least 2018 (Its plans just outline 2015-2018). This will be made possible by the fact the company also expects to increase free cash flow by 10-15% annually through 2018. Over the past few years the company has been trimming some fat and bettering it balance sheet with the sales of some assets and minority interests. Since 2012 the company has sold nearly $3B worth of assets to better position itself. It may opt to continue in 2015 to trim some more non-core holdings as it continues to focus its scope. ( click to enlarge) (Source: AES website ) Also over the past few years the company completed the repurchase of 72 million shares. It may continue to buy back shares in 2015 as well. The company has not decided yet what it will do with basically half of its discretionary cash. It projects that it will have between $560-$660 million extra to allocate to new growth investments along with possibly more share repurchases. Below is the capital plan for 2015. (Source: AES website ) Looking forward growth appears to be on good track. This is shown in the estimates for FY 2014 and FY 2015 below. 2014(est) 2015(est) % Change Revenue $16.98B $17.55B 3.30% EPS $1.28 $1.35 5.47% (Source: Yahoo Finance ) The 2014 revenue estimates are almost 7% higher than what the company reported in 2013 and this trend looks to continue into 2016 as well. The increase in EPS is a great sign as earnings next year of $1.35 points to a payout ratio of just 29.6%. EPS could also see a boost if some of the extra cash is utilized for further share repurchases. Growth through operations are going strong with 7,000 megawatts under construction, the largest construction pipeline in the company’s history. The total investment in these projects is $9 billion in which the company’s equity portion has already been funded. The ROE on these projects is expected to be greater than 15% and the company expects by the time they are all completed by 2018 they will be contributing roughly 30 cents of EPS. A short term catalyst is going to be the completion of the company’s Mong Duong power plant in Vietnam which will be brought online this year. Along with all of this the shares look undervalued at current levels as well. For starters, it currently trades at just .55x sales. I don’t usually use this as a gauge, but I believe in this case it is noteworthy because the company continues to grow revenue at a good rate. The real indicator though would be its forward price-to-earnings. At just 9.39 it is ridiculously lower than the current electric utilities industry average of 24.7 and the forward average the industry has of 19.3. This clearly points to the shares being undervalued and potentially having big upside. In conclusion, now looks like an opportune time to possible initiate a long-term position in AES. The company continues to create shareholder value through dividends and share buybacks. It also continues to expand and reinvest in its core business while trimming assets as it sees fit. Taking a look at the earnings and revenue the shares look undervalued trading nearly 20% off 52 week highs and just 3% from the lows. I believe the company is a great diversifier, and all around good long-term play.
Summary Company’s long-term performance will be positively affected by planned growth investments. Growth investments will drive its rate base and earnings growth in the long run. DUK remains committed to achieving its targeted dividend payout ratio of 65%-70%. I reiterate my bullish stance on Duke Energy (NYSE: DUK ). In this article, I will discuss in more detail the ongoing capital expenditures that the company is making, which will portend well for its financial performance. Also, I will briefly discuss the 4Q’14 earnings outlook. DUK has been progressing well with its healthy capital expenditures in regulated operations. The company’s planned capital expenditures for the next five years remain healthy, and I believe DUK will deliver decent earnings growth in the long run. Moreover, the effect of the healthy earnings growth will improve its cash flow base, due to which the company will make hefty dividend payments in the long run. The stock offers an attractive dividend yield of 3.6%, which makes it a good investment option for dividend-seeking investors. Smart Growth Investments set to Improve DUK’s Financial Performance U.S. utility stocks delivered healthy performances in 2014. Moving forward, I believe 2015 will be another good year for the utility sector. As far as DUK is concerned, the company has carved out its plans to deliver a healthy performance in the long term through acceleration in capital expenditure for long-term growth generating projects. As per its growth plans, focused on regulated operations, the company is planning to spend approximately $16-$20 billion on several growth projects from 2014 to 2018, focused on its new power generation projects. The company revealed that it will be constructing three major generation projects in Florida, with an investment of approximately $1.9 billion . Also, DUK is planning to build a 1,640MW joint cycle plant worth $1.5 billion. In addition, the company has been making progress with its two new combustion turbine plants in Suwannee, which are expected to be in service by the end of 2018. Moreover, regulators have approved DUK’s project to build a 750MW Lee natural gas plant in South Carolina, which will start providing services by the end of 2017. The value of these growth investments lies in the betterment of the company’s power generation capacity due to a significant improvement in regulated operations, which will portend well for its rate base and earnings growth in the long run. Along with power generation projects, DUK has been gradually increasing its renewable energy portfolio. So far, the company is progressing well with the constructions of its 400MW wind energy project and 100MW solar project. DUK has recently acquired a 20MW solar project from Geenex and ET solar Energy Corporation; the project’s site, being located in Dominion North Carolina Power’s service area, will allow the company to generate revenue by selling electricity generated from the project for a period of 15 years. In future, DUK will be making more investments in its renewable generation projects. All these renewable energy generation investments will not only diversify the company’s generation mix, but will help it meet environmental standards. I believe DUK’s increased focus on renewable energy sources will deliver a significant upside to the company’s financial performance in the long run. In addition, DUK is actively evaluating all growth opportunities in international markets to generate growth in the long run. Also, DUK is conducting a strategic examination of international operations to get tax benefits of approximately $1.7 billion . The company’s strategic overview of international operations is still in progress, but by the time DUK will start pursuing tax saving initiatives for its international operations, its stock price will be positively affected. Owing to DUK’s healthy capital expenditures for the next five years, active investments in renewable energy resources and international growth opportunities, I believe the company’s earnings will be positively affected in the long term. Analysts are expecting that DUK’s long-term earnings will grow at approximately 4.76% , better than Southern Company’s (NYSE: SO ) earnings growth of 3.63% . The company is scheduled to report its 4Q’14 earnings next month. The company will provide an update on its future capital expenditure outlook; any increases in planned capital expenditures will positively affect the company’s growth potential and stock price. Also, the company will provide the 1Q’15 and full year 2015 earnings guidance. Analysts are expecting DUK to report an EPS of $0.88 for 4Q’14. In the last four quarters, the company reported three earnings beats. The one earnings miss was due to an impairment charge related to Midwest assets. I believe that as the company has finalized the sale of Midwest assets, it will report strong earnings for 4Q’15. The following table shows the actual EPS and consensus EPS estimates for the last four quarters. (click to enlarge) Source: Yahoofinance.com Healthy Returns DUK has been sharing its success with shareholders through dividends. The company recently announced a quarterly dividend payment of $0.795 , which marked its 85th consecutive year of dividend payments. The company currently offers a healthy dividend yield of 3.60% . The company’s impressive cash flows have been backing these impressive dividend payments, as shown below. DUK’s healthy growth prospects indicate that its cash flow productivity will improve in the years ahead, helping it affirm its commitment to rewarding shareholders through dividend payments. Owing to its ability to pay dividends consistently in upcoming years, I believe DUK remains a good investment option for shareholders. Moreover, the company can use $2.8 billion in cash proceeds from the Midwest assets sale to repurchase shares or boost dividends. Owing to DUK’s shareholder-friendly cash return policy, I believe the company will utilize all growth prospects that could support its healthy cash return policy in order to ensure consistent dividend increases in the years ahead. The following table shows the ongoing increases in dividend per share, ROE, dividend payout ratio and dividend coverage for the company, for 2012 and 2013. The table also includes my estimated figures for 2014 and 2015. (Note *Dividend Coverage Ratio = Operating Cash Flow/Annual Dividends) Dividend Per Share Dividend Payout Dividend Coverage ROE 2012 $3.03 70% 3x 9.5% 2013 $3.12 71.7% 2.9x 6.3% 2014(E) $3.15 69.6% 3.2x 7.6% 2015(E) $3.25 68.7% 3.8x 7.7% Source: Company’s Reports and Equity watch’s Calculations Using Estimates Conclusion DUK’s long-term performance will be positively affected by planned growth investments. The growth investments, directed at improving the company’s operational performance, will drive its rate base and earnings growth in the long run. Also, DUK’s healthy growth prospects will portend well for the betterment of its cash flow base, which will allow the company to consistently increase dividends. Moreover, DUK remains committed to achieving its targeted dividend payout ratio of 65%-70% . Due to the aforementioned factors, I remain bullish on DUK.