D or DUK: Which Utility Stock is Better Placed for 2H20?

The novel coronavirus outbreak has resulted in an unprecedented economic crisis, putting millions of Americans in financial distress. Amid such a condition, utilities belonging to the Zacks Utility – Electric Power industry have ensured 24x7 electricity supply to every customer even if they fail to clear service dues. The utilities are also assisting customers with flexible payment options to clear dues. Per the U.S. Energy Information Administration, demand for electricity in 2020 is expected to drop 5.7% due to the pandemic and the same will likely increase 1% in 2021.

A transition in the U.S. utility space in quite evident as more operators are voluntarily announcing long-term plans to go carbon neutral or lower emissions substantially from historical levels. Utilities are gradually moving away from coal, and starting to focus on clean natural gas and renewable sources to generate electricity. Millions of dollars are being invested to generate electricity from clean sources, and maintain and upgrade the existing electric infrastructure. Investment in infrastructure increases resilience of the service providers and ensures 24x7 electric services even during harsh weather conditions.

Hence, these capital-intensive utility companies are concerned about the continuous increase in interest rates. However, in March 2020, the Federal Reserve lowered interest rates to the near-zero level in order to boost U.S. economic growth and is expected to keep the same at low levels till 2022. Low interest rates will be a blessing for the utilities as it will provide access to low-cost funding for infrastructure development and give them an opportunity to refinance old debts with proceeds from low-interest bearing debts.

Domestic-focused, regulated utilities are often considered as bond substitutes due to their steady performance. Their capability to pay regular dividend makes them attractive to investors.

Amid the gradual reopening of economic activities and ongoing summer season, which generally spikes demand, we run a comparative analysis of two prominent electric power utilities — Dominion Energy D and Duke Energy Corporation DUK — to figure out which one is better poised for the second half of 2020.

Earnings Surprise Trend & Long-Term Growth

Dominion Energy reported average positive surprise of 1.3% in the last four quarters. Its long-term (three to five years) earnings growth is projected at 4.7%.

Duke Energy delivered average positive surprise 4.5% in the last four quarters. Its long-term earnings growth is pegged at 4.6%.

Zacks Rank

Dominion Energy currently carries a Zacks Rank #3 (Hold). The company has a market capitalization of $68.09 billion. Duke Energy also holds a Zacks Rank #3. It has a market capitalization of $58.38 billion.

You can see see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price Movement

In the past 12 months, shares of Dominion Energy have gained 5.7% against Duke Energy and  the Zacks Utility – Electric Power industry’s decline of 10.3% and 7%, respectively.

Price Performance (One Year)

Debt to Capital

The debt to capital is a good indicator of a company’s financial position. The indicator shows how much debt is used to run the business. Dominion Energy and Duke Energy have a debt to capital of 51.38% and 54.56%, respectively, compared with the industry’s 51.19%.

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.

Dividend Yield

Utility companies generally distribute dividends. Currently, the dividend yield for Dominion Energy is pegged at 4.55% and that of Duke Energy is 4.70%. Both the company’s dividend yield is better than the Zacks S&P 500 composite’s 1.99%.

Return on Equity (ROE)

ROE is a measure of a company’s efficiency in utilizing shareholders’ funds. ROE for the trailing 12 months for Dominion Energy and Duke Energy is 11.97% and 8.13%, respectively. Southern Company has outperformed the industry’s ROE of 9.19%.

Estimates Movement

In the past 30 days, the Zacks Consensus Estimate for Dominion Energy’s earnings for 2020 and 2021 has moved up 0.5% and 0.2%, respectively.

In the same time period, the Zacks Consensus Estimate for Duke Energy’s 2020 and 2021 earnings has moved up 0.6% and 0.4%, respectively.

Outcome

Both the utilities continue to provide reliable services to millions of customers in their service territories amid unprecedented economic crisis. In our opinion, Dominion Energy is a better positioned for second-half 2020, given lower debt level, better return on equity and higher return over the past 12 months.

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