2023-05-26 19:28:11 ET
Summary
- DTE Energy Company is offering a nearly 8-year high dividend yield of 3.6%.
- DTE Energy expects to grow its earnings per share by 6%-8% per year on average over the next four years thanks to its massive capital investment plan.
- DTE Energy Company expects to grow its dividend by 6%-8% per year on average in the upcoming years.
In late 2019, I recommended purchasing DTE Energy Company ( DTE ) stock for its attractive dividend yield and its promising growth prospects. Subsequent to that article, the stock rallied 29%, until it peaked last year. I then stated that the stock had become less attractive, as it was offering a 10-year low dividend yield.
Since then, the stock has pared most of its gains due the headwind from high interest rates, which render the dividends of utilities less attractive, and an abnormally warm winter. In March, I recommended buying DTE Energy again, and in this article I will analyze again why the stock has become cheap from a long-term perspective, particularly for income-oriented investors, given the nearly 8-year high yield of the stock and its promising growth prospects.
DTE Business overview
DTE Energy used to have a striking difference from most other utilities. It used to generate approximately 25%-30% of its operating income from its non-regulated business, namely gas storage and pipelines. However, due to the volatile earnings of this business, DTE Energy decided to spin-off its non-regulated division in late 2020. Now that DT Midstream, Inc. ( DTM ) has been spun-off, DTE Energy has become a pure-play utility company, with much more reliable and predictable earnings.
DTE Energy generates, purchases, distributes, and sells electricity to about 2.3 million residential, commercial, and industrial customers in southeastern Michigan. The company generates electricity through fossil fuel, hydroelectric pumped storage, and nuclear plants, as well as renewable energy assets.
The energy market is going through a secular shift, from fossil fuels to renewable energy sources. This shift has greatly accelerated since the onset of the coronavirus crisis. DTE Energy has not been caught off-guard in this secular trend. The company has stated that it aims to reduce carbon emissions by 85%, 90% and 100% by 2035, 2040 and 2050, respectively.
To this end, the utility has significantly increased its investment in renewable energy in recent years. This strategy is undoubtedly beneficial, as it has become costly to purchase rights for carbon emissions. In addition, the focus of DTE Energy on clean energy sources has helped the company maintain good relationships with regulatory authorities. As a result, the company enjoys meaningful rate hikes year after year.
DTE Energy currently experiences modest business momentum. In the first quarter of the year, the company posted a 42% decrease in its operating earnings per share, mostly due to losses in energy trading and abnormally warm winter weather. However, management reiterated its guidance for earnings per share of $6.09-$6.40 this year. At the mid-point, this guidance implies 2% growth over the prior year.
Even better, DTE Energy has promising growth prospects ahead. The company has a $21.6 billion capital investment plan in place for the next five years.
As this amount is nearly equal to the market capitalization of the stock, it is certainly excessive and confirms that management is heavily investing in future growth.
Thanks to this massive capital investment plan, DTE Energy expects to greatly improve the resilience of its network to adverse conditions and grow its earnings per share by 6%-8% per year on average over the next five years. Some investors may be looking for even higher earnings growth rates but they should realize that the above growth rate of DTE Energy comes with its proven resilience to recessions.
Just like most utility stocks, DTE Energy has proved resilient to recessions, as consumers do not reduce their consumption of electricity and natural gas even under the fiercest economic conditions. Overall, the 6%-8% expected growth rate combined with the resilience of DTE Energy creates a highly attractive risk-reward profile for the stock.
Analysts seem to agree on the promising prospects of DTE Energy. They expect the utility to grow its earnings per share by 7% per year on average over the next four years, from $6.22 this year to $8.21 in 2027. It is also worth noting that DTE Energy has exceeded the analysts’ estimates in 10 of the last 12 quarters. Given also the predictable nature of its regulated business, it is reasonable to expect the company to meet or exceed its guidance and the analysts’ consensus in the upcoming years.
Dividend
DTE Energy has paid uninterrupted dividends for more than a century and is currently offering a nearly 8-year high dividend yield of 3.6%. It has also raised its dividend for 14 consecutive years. Its last dividend hike was a 7.6% raise in the fourth quarter of 2022. As shown in the chart below, the company has been growing its dividend meaningfully since 2009.
Moreover, DTE Energy has a solid payout ratio of 62% and a healthy balance sheet. Its net debt (as per Buffett, net debt = total liabilities – cash – receivables) is standing at $30.2 billion , which is 135% of the market capitalization of the stock. While this amount of debt would be high for companies of other sectors, it is reasonable for a utility thanks to its reliable cash flows. Furthermore, net interest expense consumes only 36% of operating income. All these metrics explain why DTE Energy has received strong credit ratings from the three major credit rating firms, as shown in the above slide.
DTE Energy has provided guidance for 6%-8% average annual growth of its dividend, in line with its expected earnings growth rate. Given its healthy financial position, its resilience to recessions and its reliable growth trajectory, the company is likely to continue raising its dividend by 6%-8% per year for many more years. The next dividend hike is expected to be announced in November.
Valuation
DTE Energy Company is trading at a price-to-earnings ratio of 17.2 , which is lower than the 10-year average price-to-earnings ratio of 18.2 of the stock. The cheap valuation has resulted mostly from high interest rates, which reduce the present value of future earnings.
However, the Fed has adopted an aggressive policy in order to restore inflation to 2%. Thanks to its unprecedented pace of interest rate hikes, inflation has subsided every single month since it peaked, about a year ago. Given the determination of the central bank, it is safe to assume that inflation will revert to normal levels sooner or later.
Whenever inflation reverts towards its normal range, the Fed is likely to begin reducing interest rates and the valuation of DTE Energy is likely to return to its historical average level. This means that the stock can reward investors in three ways; its nearly 8-year high dividend yield, meaningful earnings growth and an expansion of its valuation level.
Risk
The only risk factor for DTE Energy is the unfavorable scenario of persistently high inflation for many years. In such a scenario, the stock is likely to remain under pressure for an extended period, as high interest rates will render the yield of the stock lackluster. However, the Fed has made it clear that it will exhaust its means to restore inflation to its target level. As its aggressive strategy has already begun to bear fruit, the odds of persistently high inflation for years have diminished.
Final thoughts
DTE Energy Company passes under the radar of most investors due to its mundane business model. However, DTE stock has become remarkably attractive from a long-term perspective due to the headwind from high interest rates. Thanks to its nearly 8-year high yield, its promising growth prospects and its somewhat cheap valuation, DTE Energy Company is likely to highly reward patient investors.
For further details see:
DTE Energy Is Offering A Nearly 8-Year High Dividend Yield Of 3.6%