The last time SafetyNet reviewed Duke Energy Corporation (NYSE: DUK) was in 2019. The company received an “F” rating for its diminished free cash flow and amplified debt load.
Will the storyline change this time around?
To start, many utility companies suffer from low cash flows and high fixed costs. As a result, they typically need to take on more debt to pay dividends. However, when debt is increasing substantially more than free cash flows, that’s when we have a problem.
In particular, there’s trouble when interest rates rise. It quickly becomes difficult for these companies to maintain their payouts.
And the Federal Reserve’s expected rate increase in 2023 may be problematic for these high-debt, high-dividend-yielding companies…
However, a lot has changed for the company in the past two years. Let’s find out whether Duke Energy’s dividend is still in the danger zone…
Coming Up for Air
Headquartered in Charlotte, North Carolina, Duke Energy is one of the top energy companies in the U.S., serving electric power to more than 7.9 million people. Its shares sport a robust 3.72% dividend yield. On top of that, Duke has raised its dividend every year since 2008!
That’s a stunning track record, but like most utilities, Duke is strapped with high fixed costs and low cash flow…
Over the past five years, the company has generated negative free cash flow. This means Duke’s cash from operations – the money that it brings in the door selling electric power – hasn’t been enough to cover its capital expenditures.
The money had to come from somewhere, though… and it looks like Duke has been funding its dividend, at least in part, by issuing debt.
But things are looking up for the company.
In fact, Duke’s free cash flow deficit has been strongly reversing. Free cash flow is projected to improve from negative $1.051 billion to negative $18.1 million. That’s a 98.28% increase!
From 2019 to 2020, the company’s capital expenditures declined 11%, from $11.12 billion to $9.91 billion. Declining capital expenditures combined with 4.22% forecasted revenue growth over the next year will result in continued free cash flow growth.
As a result, Duke will be able to fund the dividend using far less debt going forward. Although Duke’s payout ratio is still too high, it’s definitely moving in the right direction.
Though free cash flow is expected to continue to grow this year, Duke’s payout ratio is still a concern.
All in all, Duke has showcased its commitment to its dividend by annually increasing it the last 13 years. And more importantly, analysts expect further increases over the next couple of years. Management’s demonstrated commitment to the dividend, coupled with strong free cash flow growth, makes Duke’s dividend safe for now.
Dividend Safety Rating: B
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