Utility stocks are among the safest investment bets owing to more or less stable demand, irrespective of the economic cycles. The outbreak of coronavirus pandemic put millions of Americans in financial distress, causing failure in payment of utility dues. At such a time, companies belonging to the
Zacks Utility – Electric Power
industry ensured to provide 24×7 services to customers despite their pending payments.
Electric utilities need to make huge capital investments in building power generation plants, strengthening their transmission and distribution lines, and using modern technologies to provide uninterrupted power supply even during harsh weather conditions. Further, with the world moving to clean and sustainable energy, utilities are spending huge amounts of money on the same. Companies announced long-term plans to go carbon neutral or lower emissions substantially. Utilities are gradually reducing the usage of coal and starting to focus on clean natural gas and renewable sources to generate electricity.
Being capital-intensive in nature, fund raising at favorable rates is critical for the utility companies. Given the ongoing pandemic, the Federal Reserve decided to lower interest rates to near-zero level for boosting U.S. economic growth. The same is likely to remain at moderate levels until 2022. Thus, companies in the utility space will be able to access low-cost funding for their developmental activities and refinancing of high interest-bearing debts.
Moreover, utilities are favored by investors for stable returns and their ability to pay regular dividend, and are often treated as bond substitutes.
Amid such favorable trends and with economic activities reopening, we run a comparative analysis of two prominent electric power utilities, namely Dominion Energy, Inc.
D
and Duke Energy Corporation
DUK
to determine which stock is better poised right now.
Both stocks currently carry a Zacks Rank #3 (Hold). Dominion Energy and Duke Energy have a market capitalization of $67.29 billion and $67.47 billion, respectively. You can see
the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
.
Estimate Movement
In the past 60 days, the Zacks Consensus Estimate for Dominion Energy’s 2020 earnings has moved 0.55% north to $3.63. The company’s year-over-year earnings are expected to decline at 14.39%.
The Zacks Consensus Estimate for Duke Energy’s 2020 earnings has been revised 0.59% upward to $5.08 in the past 60 days. Its year-over-year earnings growth is pegged at 0.40%.
Earnings Surprise Trend & Long-Term Growth
Dominion Energy delivered a trailing four-quarter surprise of 0.94%, on average. Its long-term (three to five years) earnings growth is projected at 3.53%.
Duke Energy delivered a trailing four-quarter surprise of 1.85%, on average. Its long-term earnings growth is pegged at 3.10%.
Return on Equity (ROE)
ROE is the measure of a company’s efficiency in utilizing its shareholders’ funds. Dominion Energy and Duke Energy have a trailing 12-month ROE of 12.09% and 8.10%, respectively. The industry’s ROE for the same period came in at 7.73%.
Dividend Yield
Dividend yield is the estimated one-year return on investment in a company, based only on dividend payment. Currently, the dividend yield for Dominion Energy is 4.64%, higher than 4.25% for Duke Energy. Both companies’ dividend yields are better than the industry’s 3.52%.
Debt to Capital
The debt-to-capital ratio is a good indicator of a company’s financial position and shows how much debt is used to run its business. Dominion Energy has a debt-to-capital ratio of 56.50% compared with Duke Energy’s 56.24%. The utility power industry’s average debt-to-capital is 57.53%.
Investment Plans
Dominion Energy plans to invest $23.9 billion in the 2020-2022 time period to strengthen its existing infrastructure while Duke Energy intends to invest $42.7 billion in overall growth projects during the 2020-2024 time period.
Price Movement
In the past six months, shares of Dominion Energy and Duke Energy have returned 3.7% and 6.1%, respectively. The industry has recorded 2.4% growth in the said period.
Conclusion
Both utilities seem a good choice to hold onto in one’s investment portfolio as they continue to provide continuous power supply to their customers. Also, their capex plans are on track to enhance their infrastructure and increase the reliability of the services provided. While Dominion Energyhas a better ROE and expected long-term earnings growth, Duke Energy is comparatively better positioned for the rest of 2020, given its stronger price performance in the past six months, lower debt and higher year-over-year estimates.
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