Duke's International Businesses and Cash Generation

In this article, let's take a look at Duke Energy Corporation (DUK, Financial), a $56.8 billion market cap company that provides electric and gas utility services in the southeastern U.S. and Ohio.

Pure regulated utility

Duke Energy agreed to sell its 7.5 gigawatt Midwest commercial generation fleet portfolio to Dynegy, in a transaction valued at $2.8 billion. “This transaction is an important milestone in our strategy to exit the merchant generation business," said Marc Manly, president of Duke Energy’s Commercial Businesses. An important consequence is that the deal reduces the firm's exposure to the risk of commodity prices.

The company is the largest utility in the U.S. after it merged with Progress Energy last year. But it also focuses on power generation in Latin America. For example, Brazil represents about half of total operating revenue. Further, we can highlight a promising joint venture in Saudi Arabia with National Methanol Company, a large producer of methanol and methyl tertiary butyl ether.

Cash dividends

Dividend payment history affirms its commitment to maximizing shareholder wealth. The company raised its quarterly dividend by $0.015 to $0.795 per quarter, or an annual rate of $3.18 per share. This is a 1.9% increase from the prior dividend of $0.78. The company has paid quarterly dividends continuously since 1926. The current dividend yield is 4.0%, which is higher than 68% of the 816 companies in the Utilities-Diversified industry as well as S&P 500 average dividend yields.

Revenues, margins and profitability

Looking at profitability, revenue growth by 3.34% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.25 vs $1.33). During the past fiscal year, the company increased its bottom line. It earned $3.63 versus $3.06 in the previous year. This year, Wall Street expects an improvement in earnings ($4.58 versus $3.63).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

The company has a current ROE of 6.02% which is lower than the one exhibit by Southern Co. (CO), Exelon (EXC, Financial) and PPL Corp. (PPL, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Twenty-First Century Fox Inc. (FOXA, Financial) could be the option. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 23.0x, trading at a premium compared to an average of 20.5x for the industry. To use another metric, its price-to-book ratio of 1.37x indicates a discount versus the industry average of 1.64x while the price-to-sales ratio of 2.2x is above the industry average of 1.63x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $21,859, which represents a 16.9% compound annual growth rate (CAGR).

Final comment

This Fortune 250 company is a diversified energy company with a portfolio of domestic and international, natural gas and electric, regulated and unregulated businesses. As outlined in the article, with the sale and if the firm search for buyers for its Latin American operations, it could complete its transformation to a pure regulated utility.

The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.

Hedge fund gurus like Robert Bruce (Trades, Portfolio) and Jim Simons (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned