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What Will Drive DUK’s Dividend Growth?

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What is the dividend outlook?

Duke Energy’s (DUK) present dividend yield of 4.7% has been driven by dividend growth and price loss. Dividends rose 4% in both 2016 and 2017. The dividend is projected to grow by 2% in 2018.

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What is the projected dividend payout?

The company recorded a dividend payout of 72% and 76% in 2016 and 2017, respectively. It has a projected dividend payout of 75% in 2018. The company has been unable to generate enough free cash flow to cover its dividend payments due to high capital expenditure relative to its operating cash flow.

What drove the operating revenue growth?

Operating revenue grew 2% and 4% in 2016 and 2017, respectively. Nonregulated electric and other and regulated natural gas drove the growth in 2016 offset by regulated electric, while regulated natural gas drove the growth in the first nine months of 2017 offset by the rest. The Gas Utilities and Infrastructure and Commercial Renewables segments drove the growth in 2016 offset by Electric Utilities and Infrastructure, while every segment drove the growth in 2017.

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What led to the EPS decline?

Electric, energy, and fuel costs dropped 8% in 2016 before increasing 1% in 2017, which led to 7% and 5% growth in gross profit for 2016 and 9M17, respectively. Operating expenses rose 7% and 3% in 2016 and 2017, respectively. Significant impairment charges were recorded in 2015 and 2017. As a result, operating income grew 5% and 8% in 2016 and 9M17, respectively.

Other net expenses rose 38% in 2016 and decreased 6% in 2017. The rise was due to higher interest expenses. This translated into net income growth of 3% in 2016 before falling 1% in 2017. EPS grew 3% in 2016 before dropping 3% in 2017.

What will drive the future operating revenue and EPS?

In 2017, the company began important strategic initiatives that could drive its revenue and earnings overall. The regulatory settlement approved in Florida will likely enable the company to generate investments and grid modernization in solar energy. The FERC certificate for the Atlantic Coast Pipeline will likely enable the company to begin construction this year.

Operating revenue and EPS have been projected to grow 4% in 2018. A PE of 17.9x and a dividend yield of 4.7% compares to a sector average PE and a dividend yield of 58.1x and 3.8%, respectively.

Dividend ETFs with exposure to DUK

The PowerShares S&P 500 High Dividend Low Volatility Portfolio (SPHD) has a PE of 17.3x and a dividend yield of 3.3%. The Legg Mason Low Volatility High Dividend ETF (LVHD) has a PE of 16.7x and a dividend yield of 3.4%.

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