Utility provides basic services and is not affected by the vagaries of the economy. Regulated and domestic-focused utility companies keep on adding, maintaining and upgrading their existing assets to provide uninterrupted 24x7 services to its customers.
Utility operation is capital intensive as consistent investment is required to upgrade, maintain and replace older wires and electric poles as well as power stations. So, apart from internal sources of funds, utilities depend on the credit market for funds to carry on upgradation activities.
The Fed rate has now been raised for the ninth time since the first hike was announced in December 2015, when the U.S. economy pulled itself out of the Great Recession. In a way, rising interest rates increase this sector’s cost of capital, in turn, impacting margins. Plus, higher cost of funding could force utilities to delay their capital expenditure plans, impacting cash flow and earnings growth.
Amid the above backdrop, let’s focus on two large Zacks Utility - Electric Power industry stocks NextEra Energy, Inc (NEE - Free Report) and Duke Energy Corporation (DUK - Free Report) to ascertain which is a better option going into 2019. Steady performance, along with stable earnings and cash flow, enables these companies to reward investors through regular dividends.
NextEra Energy, currently carrying a Zacks Rank #2 (Buy), has a market capitalization of $80.33 billion. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Duke Energy Corporation, also carrying a Zacks Rank #2, has a market capitalization of $59.82 billion.
In the past 12 months, shares of NextEra Energy have gained 8.3% while Duke Energy’s shares have lost 0.1%. The industry witnessed a decline of 4.5% over the same period.
Long-Term Earnings Growth and Surprise Trend
NextEra Energy’s long-term (3 to 5 years) earnings are expected to improve 8.65% compared with 5.03% for Duke Energy for the same time frame.
NextEra Energy and Duke Energy both outpaced the Zacks Consensus Estimate in three of the trailing four quarters, the average positive earnings surprises being 1.7% and 3.18%, respectively.
Return on Equity (ROE)
ROE is a measure of a company’s efficiency in utilizing shareholder’s funds. ROE for the trailing 12 months for Duke Energy and NextEra Energy is 8.02% and 10.21%, respectively. The companies outperformed the industry’s ROE of 9.44%.
The debt-to-capital ratio is a good indicator of the financial position of a company. The indicator shows how much debt is used to run the business. NextEra Energy has a debt-to-capital ratio of 42.01% compared with the industry’s 49.52%. Meanwhile, Duke Energy has a debt-to-capital ratio of 54.01%.
Utility companies generally distribute dividends. Currently, the dividend yield for NextEra Energy is at 2.64%, lower than 4.42% for Duke Energy. Duke Energy’s dividend yield is also better than the industry’s 3.26%.
Even though the companies have wide operations in the United States, from the above comparisons it is quite evident that NextEra Energy is a better utility stock to accumulate.
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