DUK - Duke Energy Is Preparing For An Uncertain Future

Summary

• Duke Energy has pledged to significantly reduce carbon emissions by 2030 and be net-zero by 2050.
• It is currently adding to revenue and diversifying its energy portfolio by incorporating renewable sources.
• The company has plans to expand its grid-scale energy storage and charging EV capabilities and to become part of a future Hydrogen infrastructure.

Thesis

Despite its size and complexity, Duke Energy Corporation ( DUK ) remains committed to providing reliable, affordable, and sustainable energy to its customers. The company is a leader in the electric power industry, and is poised to continue to play a key role in shaping the future of energy production and distribution in the United States and beyond. I am assigning a Buy rating to Duke Energy because they are both forward looking and have steadily growing revenues.

Company Background

Duke Energy is a large American electric power holding company that provides electricity to over 8 million customers across six states. Duke Energy has a long and storied history dating back over a century, and operates a vast network of power plants and transmission lines, producing electricity from a wide range of sources, including nuclear, coal, natural gas, and renewable energy sources like wind and solar. The company is committed to sustainable energy production by setting a goal to achieve net-zero carbon emissions before 2050, and has announced plans to invest $56 billion in renewable energy and grid infrastructure over the next decade.

An Eye Toward The Future

A key factor in Duke Energy's long term viability is its commitment to sustainability. As the world becomes increasingly concerned about the environmental impact of fossil fuels, companies that prioritize sustainability are less likely to slip into irrelevancy.

The company has been exploring energy storage technologies, such as batteries, to help integrate renewable energy into the grid. They have installed several grid-scale battery storage systems in North Carolina and Florida . In addition to storage, they are also investing in electric vehicle charging infrastructure .

The company has invested heavily in wind and solar power in recent years, with a goal of owning or controlling 16,000 MW of renewable energy capacity by 2025. As of 2021, the company had more than 8,000 MW of wind, solar, and biomass energy in its portfolio and has been expanding its clean energy portfolio through recent acquisitions. The company revealed plans to purchase a 100 MW solar project in Mississippi in November 2022, and a 175 MW solar project that is currently under construction in Colorado in January 2023. They expect to benefit from the Inflation Reduction Act, particularly through production tax credits for nuclear and solar generation. These developments demonstrate Duke Energy's commitment to sustainable energy production and investment in the future of clean energy.

The company has retired more than 50 coal-fired power plants since 2010, citing the declining economics of coal and the need to reduce greenhouse gas emissions. A group of utilities including Duke Energy are pursuing federal funding for a Hydrogen hub in the southeastern United States. Several auto makers have begun the process of building out a fleet of Hydrogen based vehicles and our infrastructure will need to update to meet their needs. The future of our energy consumption looks like it will be more diverse than it is today and Duke doesn't want to be left behind

Long-Term Trends

Oil & gas Market Size is projected to have a CAGR of 5.4% and Reach $252.56B by 2028; for an already mature industry this is a healthy growth rate. The solar industry is projected to have a CAGR of 25.7% and reach $902.5B by 2028. Generating Hydrogen as a fuel has a projected CAGR of 39.6% and reach $58.53B by 2030. The company is transitioning away from coal so citing the CAGR on coal is pointless. The long-term outlook for fossil fuels is highly dependent on the pace of energy transition towards renewable energy sources. While it is expected that the demand for fossil fuels will eventually decline due to the increasing adoption of renewable energy technologies, the rate of this transition remains uncertain.

In the short to medium term, fossil fuel prices are likely to remain volatile and subject to a range of economic, political, and environmental factors. Over the long term, macro factors will determine price. The diversity of energy sources that Duke is incorporating into its portfolio is arming the company with an adaptability advantage in the face of our uncertain future.

Financials

Duke Energy has historically had fairly stable revenue but it has been climbing recently. Net income does vary dramatically with the price of fuel but the company consistently produces it. As evidence of this, the dividend has risen for the last 11 years . The company has adopted the stance that it needs to update and diversify its energy portfolio. Instead of merely maintaining business as usual and slowly slipping away into irrelevancy, Duke's shift in attitude seems to be causing a business life cycle extension.

Valuation

As of Feb 24, 2023, DUK has a market capitalization of $74.57B, trades at a forward P/E of 17.12 and had a share price of $96.92. They have a forward EPS of $5.66, and with their forward dividend of $4.02 per share they are left with $1.64 per share to expand and innovate. This gives them a dividend payout ratio of 71%, which is a bit high for most industries but considered sustainable for utilities. I really like that the remaining 31% left the company with a little over $827M in extra cash for 2022. Innovation costs money, and this company has an ample supply of it.

Using 2022's annual growth rate of 16.58%, an annual dividend of 4.15%, and a P/E ratio of 17.12, Peter Lynch's inverted PEGY for estimating fair value produces a value of 1.21. That falls into undervalued territory as it's above 1 and roughly translates to a fair value price of $117.27 per share. Using 2023's estimated annual growth rate of 4.23% gives us a value of 0.489, which is roughly $47.44 per share. The significant difference in these rough approximations is caused by the lower expected income growth. I am not interested in trusting either estimate, true fair value is likely somewhere in between. From what I can tell by reading the quarterly reports and looking over the financials , the drop in short term income growth is mostly due to the transition, something the company has control over. Evidence of this can be seen from the $1.277B loss from Earnings Of Discontinued Operations in Q4 2022.

Since the company is spending money on expansion, some of that money should translate into additional future growth. The problem comes with trying to produce an estimate for average annual growth over many years based on what the company is doing now. While I might not have a very clear picture of what their immediate future looks like, they have control over the pace of both shut downs and new acquisitions, and are likely to handle the transition responsibly. I expect them to try to juggle everything in such a way that they can keep steadily growing their dividend at roughly the rate they have been. This is also why I don't trust long term price targets when innovation is involved... most of those numbers are based on the recent financials of the company and that data is, by definition, always lagging.

Catalysts

Duke Energy is one of several companies lobbying for federal funding for a Hydrogen hub in the southeastern United States. The announcement of this funding is unlikely to significantly move share price, but it does represent a boon to long term fundamentals. As the hydrogen infrastructure is built out, Duke will be able to open up new revenue streams.

The company expects to benefit from the Inflation Reduction Act , particularly through production tax credits for nuclear and solar generation. Depending on who gains political power over the next decade, we could see either additional subsidies and government assistance, or the already existing subsidies and assistance revoked. The present momentum is clearly in favor of additional subsidies, but this could change.

Risks

The fossil fuel industry is notoriously cyclical, which can impact the company's revenue and earnings. Additionally, there is always the risk of operational issues, including accidents or natural disasters, which can impact both revenues and costs.

While I am talking about risks I want to bring up the companies pledge to reach carbon neutral. It is very likely that most energy companies are about to spend the next decade or more lobbying against the initiation of a carbon tax. Duke Energy will view such a tax as an inconvenience that will go away as they continue transitioning and so will view spending money on lobbyists as a waste. Not only are they actively removing themselves from that risk, the onset of such a tax would only help make them more competitive than most of their peers.

Conclusion

The fear with dividend stocks is that after you buy them, the company is going to lose some of their edges and their already established moats will be eroded as they slowly slip into irrelevancy . This company's pledge to produce 100% carbon-free electricity by 2050 sets up a narrative that helps them stand out from other energy companies.

Duke Energy is preparing for an uncertain future. That's one of the most important things I look for in potential long term holds, companies that are adaptive are less likely to lose their already established edges and are more likely to develop new ones. The only companies that are worth investing into at all, are the ones that they look like they are determined to stay relevant through everchanging conditions.

What Is My Plan With Duke Energy?

While I think Duke Energy is a worth buying, I don't think it's a great buy at any price. Since the variable growth expectations produced such a wide range for fair value. I am forced to look at buying into the company from the point of view of a technical trader and not a fundamental investor. Meaning, if I were to try and establish a position in Duke, I would be dollar cost averaging at regular intervals while buying more heavily at perceived bottoms. After establishing a larger than intended position, the next time it reaches a perceived top; I would set my brokerage software to sell the most expensive shares first and then trim the position. This way my most efficiently deployed capital gets to stay in the investment, and the rest can be redeployed to other places.

Looking over the chart, it has a clear ascending zone of liquidity.

I typically invest into disruptive technologies and business models. If Duke wasn't in the middle of a major portfolio restructure, I wouldn't be paying attention to them. The entire reason I started is because I am bullish on the future of grid-scale energy storage and Duke has been expanding storage capacity. As is, I am a growth investor and not currently on the hunt for any dividend stocks. Though I will keep watching Duke and the next time a global black swan event tanks valuations, it is on my short list of extremely reliable companies that are worth buying the dip on during uncertain times.

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