Duke, NextEra, Southern: Are Big Utilities Riskier Through This Downturn?

DUK: Duke Energy logo
Duke Energy

Utility stocks, which are seen as defensive bets, are usually attractive to yield-seeking investors at times of crises, considering that their cash flows and dividends hold up relatively well. This trend might be more prominent in the current environment, with the U.S. federal funds rate down to levels of 0.25% from about 1.75% just two months ago. However, utilities have not meaningfully outperformed the market through the current sell-off, with our theme of 4 utility stocks – which includes NextEra Energy, Duke Energy (NYSE:DUK), and others – down by almost 9% year-to-date compared to the S&P 500 which is down 13%. Below, we take a look at why the stocks could be underperforming and whether they are good bets at current levels?

Commercial And Industrial Demand Declines, Higher Leverage

Although dividend cuts in the industry are rare, the sector does face higher risks this time around. Firstly, there are concerns that industrial and commercial demand – which together account for about 61% of retail electricity sales in the U.S- could take a meaningful hit through the pandemic and the resulting lockdowns. The U.S. Energy Information Administration has also indicated that total electricity generation in the U.S. could fall by 3% this year and we wouldn’t be surprised at all if it falls further, given the dire GDP projections for Q2. Separately, utility companies have been increasing their debt load in recent years and capital intensity for the business also remains high, increasing their risk profile. Below, we take a look at some of the key names in the utility space and how their stocks have performed through the current crises. For more details on the stock price and fundamental performance of some of the largest U.S-based utilities, view our dashboard Utility Theme: NextEra, Duke, Dominion & Southern

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A Few High-Profit Utility Names

NextEra Energy ($111 Billion Market Cap, 2.47% Dividend Yield, -5% YTD), the largest U.S. utility company by market cap operates Florida Power and Light, the largest electric utility in the state of Florida, and also has a non-regulated arm called NextEra Energy Resources which is one of the world’s largest producers of renewable energy. NextEra has a lower debt load and thicker operating margins compared to some other rivals.

Duke Energy ($61 Billion Market Cap, 4.57% Dividend Yield, -8% YTD) is one of the largest electric and gas utilities in terms of customers, serving ~7.7 million electric customers in the U.S. Southeast and Midwest. The company also provides Natural Gas via its Piedmont Natural Gas and Duke Ohio operations. The company could be viewed as a relative value bet in the utility space, trading at roughly 17x trailing earnings.

Dominion Energy ($63 Billion Market Cap, 4.97% Dividend Yield, -8% YTD) operates in close to 20 states, including Connecticut, Georgia, and California, and serves over 7 million customers. The company has been increasingly pursuing renewable energy projects over the last several years.

Did you know that NextEra trades at an earnings multiple that is over 50% higher than Duke? Our analysis  Duke Energy Or NextEra: Which Is The Better Defensive Bet? compares the fundamental and stock price performance of Duke and NextEra.

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