This Dividend-Payer Is on Sale

Andrew Bischof: We believe Duke Energy (DUK) offers a compelling investment opportunity for the long-term investor. Duke Energy is the largest U.S. utility, with regulated operations across five states delivering electricity and gas to more than seven million customers. Narrow-moat Duke is predominantly a regulated utility but also operates in the unregulated renewable commercial-power and international-energy segments.

Duke is trading at roughly a 14% discount to our $83 per share fair value estimate and has an attractive 4.5% dividend yield. Duke operates in highly constructive regulated jurisdictions, which we believe will help protect allowed returns in an increasing-interest-rate environment. Duke's regulated business historically makes up about 85% of consolidated earnings, and we expect cumulative capital expenditures--of which 70% is growth capital--during the next five years to support our 4.5% earnings growth estimate.

We believe the market has incorrectly focused on near-term weakness at the company's international unit, which historically contributes just 10% to total earnings. Brazil's drought condition and challenging economic environment have depressed profits, a trend we expect through 2016. We think these challenges are manageable and short term in nature, and allow an investor an opportunity to own a premium utility at a discount to our intrinsic fair value estimate.