Why the Backtrack?
The IndyStart Writes
In April, President Donald Trump signed an executive order with the aim to reinvigorate the industry in the United States, and in a similar fashion, Gov. Mike Braun subsequently directed state agencies to consider extending the lives coal plants across Indiana.
The settlement between REI and Duke proposes to do just that. After REI’s initial opposition to shutting down the two coal plants, Duke agreed to study the feasibility of keeping the two plants online. But one stipulation of the agreement is that the coal study and sale cannot affect the construction, cost or operation of the new gas units.
It’s unclear what the feasibility study might show, according to Protogere.
The coal plants at Cayuga are currently using infrastructure the natural gas plants would need, like a switchyard and the transmission lines that direct power out of the site. And the coal plants are old. Last month, Protogere told IndyStar the aging plants would require “significant investment” to maintain.
Clean energy is a contentious term in Indiana
Earlier this year, Duke petitioned for the original project under a statute allowing natural gas units to qualify for clean energy incentives if they displace coal-fired electricity generation.
The incentive Duke asked to use would allow the utility to charge its customers in advance for construction of the natural gas project — even before it goes online.
There isn’t a seller lined up yet, but “say a data center comes in, those two coal units can power the data center,” Kerstiens said. Then, “if you’re a Duke ratepayer, you’re not on the hook for paying for that data center.”
Implications for Investors
Key Indicators
- Dividend Yield and Payment History: Duke Energy offers a current dividend yield of approximately 3.57%–3.62%, with an annual dividend of $4.18–$4.19 per share. The company has paid dividends for 99 consecutive years and increased them for 18 consecutive years, indicating a strong historical commitment.
- Payout Ratio: The dividend payout ratio is around 69%–75%, based on recent earnings per share (EPS) of $6.03. This suggests that Duke Energy distributes a significant but manageable portion of its earnings as dividends, leaving room for reinvestment or resilience against downturns. A ratio below 80% is generally considered sustainable for utilities.
- Earnings and Cash Flow: Duke’s profitability rank is strong (around 8/10), with a 3-year EPS growth rate of approximately 36.2% annually. However, cash flow coverage appears limited, as some sources note the company has no significant free cash flows, which could pose a challenge if earnings falter.
- Debt and Capital Expenditures: With an $83 billion five-year capital plan and rising interest expenses, Duke’s debt levels and equity funding needs ($6.5 billion over five years) could strain finances. Utilities typically carry higher debt, but excessive leverage could threaten dividend stability if not offset by rate increases or regulatory support.
- Growth and Demand: Anticipated load growth of 3-4% starting in 2027, driven by economic development, supports long-term revenue potential. However, delays in renewable projects and the decision to retain coal units may increase regulatory or operational risks, impacting future earnings.
Sustainability Assessment
- Strengths: The consistent dividend growth, reasonable payout ratio, and stable utility business model suggest sustainability in the near term. The company’s regulated operations provide predictable cash flows, supporting its 99-year dividend streak.
- Concerns: Limited free cash flow, high capital expenditures, and potential regulatory pressures from coal retention could challenge long-term sustainability. A payout ratio nearing 75% leaves less buffer if earnings decline, especially with rising debt costs.
Investor Considerations
- Monitor future earnings reports (next expected in early August 2025) for updates on cash flow and debt management.
- Watch for regulatory outcomes on coal and gas transitions, which could affect profitability.
- A yield of 3.57%–3.62% is attractive for income investors, but diversification is wise given potential volatility from policy shifts.
Overall, Duke Energy’s dividend appears sustainable in the short term, supported by its track record and earnings coverage. However, long-term stability depends on effectively managing debt and transitioning to cleaner energy sources.
