Duke Energy's (DUK 0.03%) shares are down around 17% from their 52-week high, roughly in line with the broader utility group, using Vanguard Utilities Index ETF (VPU -0.27%) as a proxy. The big picture behind the drop is at least partly driven by rising interest rates, which make other income products, like CDs, more competitive. But there were also some worrying trends in Duke's third-quarter earnings results. The good news is that the bad news was hiding some positive trends.
Duke's yield is attractive today
You could probably buy a CD with a yield that's exactly the same as Duke's roughly 4.6% dividend yield. The problem is that the income CDs provide doesn't increase over time, while Duke's dividend has been increased annually for 19 consecutive years. To be fair, the average annualized increase over the past decade was a bit miserly at 2.5% or so.
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That said, Duke is projecting earnings growth of 5% to 7% over the foreseeable future. The dividend is likely to grow in line with earnings growth. Thus, the 2.5% growth rate of the past will probably be the worst-case scenario. And even in that situation, investors are still benefiting from income growth that wouldn't be available from a CD. The current yield also happens to be near the high end of the stock's yield range over the past decade, suggesting the stock could be attractively priced right now.
For conservative investors, Duke Energy is probably worth a deep dive. The fact that it is a large and fairly simple regulated utility is an additional positive since spending plans and rate increases are approved by the government. That makes the business very predictable. But there was one big negative in the company's third-quarter 2023 financial results -- rolling 12-month demand fell 1.2%.
Duke's demand profile is not as bad as it looks
A utility that's seeing less demand will have a hard time growing. So, it is important to understand what is going on. The first negative is that demand from residential customers is in a state of flux thanks to the work-from-home trend that is slowly starting to reverse course. There could be more volatility here than usual for a bit longer as people start going back to work, reducing residential demand.
The second big negative is a slowdown in manufacturing demand. That's related to the vagaries of the economy and will likely recover over time. Right now, Duke's management is expecting manufacturing demand to improve in 2024 or 2025. Industrial demand came in as expected.
Now for the good news. Residential customer count grew 1.9% year over year in the third quarter. The demand drop was because of less use per customer as people went back to working in the office. Duke expects customer growth to continue in the future. More customers normally means more demand unless there was a pandemic that forced people to work from home thrown into the mix. Eventually, the customer growth will shine through and boost demand again.
Then there's "economic development," as Duke is calling it. There's an interplay here. More people means more need for things that people use, like stores and employment. The utility expects economic development to be a huge demand driver over the next four years, likely aided by more people going back to work. In 2024, economic development will likely add 1,000 to 2,000 gigawatt hours of demand, which will grow to 7,000 to 9,000 gigawatt hours by 2027.
Now, to be fair, Duke is a big utility, and it takes a lot to move the needle. It is projecting overall annual demand growth to be in the range of 0.5% to 1% over the 2024 to 2027 span. But that's still pretty solid. Any faster, and the utility might have trouble keeping up with the demand, which would not be good. That slow and steady demand growth is also enough to support the earnings growth expectation of 5% to 7%, which will drive continued dividend growth.
Duke is a boring and reliable dividend stock
Duke Energy won't be a good fit for all investors. It is really the kind of stock that conservative income-focused investors would want to hold as a foundational investment. If that sounds like you, then it may be time to take a look at Duke Energy stock. On that score, the underlying demand trends are far more positive than the high-level demand results, hinting that the future will look much better than the recent past. And remember that a super-safe CD is great, but inflation will eat away at the buying power of the income it throws off. Duke's ability to grow its dividend, thanks to a growing business, can help protect you from that.
