Duke Energy: A Regulated Utility Delivering Reliable Dividends Since 1927

Duke Energy's history began in the early 1900s when James Duke built a system of lakes and dams along a river in South Carolina to generate electricity. Today, Duke Energy is one of the largest regulated utilities in the U.S. with operations spanning seven states in the Southeast and Midwest.

The company generates the vast majority of its net income from electric utilities, with gas utilities, infrastructure, and commercial renewables contributing the remainder.

With more than 90% of earnings generated from regulated activities, Duke's predictable cash flow stream has enabled the firm to pay quarterly dividends uninterrupted since 1927 and increase its dividend each year since 2007. The regulated utility's steady nature should help Duke continue extending this streak.

Many utility companies are essentially government regulated monopolies in the regions they operate in. Duke's utilities are no exception, acting as sole suppliers in most of their service territories.

Power plants, transmission lines, and distribution networks cost billions of dollars to build and maintain in order to supply customers with power. Therefore, it isn’t economical to have more than one utility supplier in most regions because the base of customers is only so big relative to the investments required to provide them with electricity and gas.

Competition is further reduced by state utility commissions, which have varying degrees of power over the companies allowed to construct generating facilities.

However, the monopoly status of most regulated utilities has a major downside: the price they can charge for their services is controlled by state commissions.

This is done to keep rates reasonable for consumers while providing utility companies with enough of an incentive to earn a reasonable return on their investments made to provide safe and reliable service.

As a result, it’s important to analyze the geographic regions that a utility company operates in. Some states have more favorable demographics (e.g. population growth) and regulatory bodies. 

Fortunately, Duke Energy operates in generally good regions. The company has a strong presence in four of the top 10 states for population migration, including Florida and the Carolinas which, in aggregate, contribute over half of Duke's profits.

Besides solid underlying customer growth, Duke's utilities are concentrated in areas that have historically constructive regulation. Weighted by rate base, Duke operates in the top 20% of jurisdictions in the country, according to estimates made by activist investor Elliott Management.

This is important because state utility commissions set the rates utilities are allowed to charge their customers and oversee a utility's investment plans. Coupled with Duke's BBB+ credit rating, the firm should have no trouble continuing to grow its earnings and dividend as it invests in its infrastructure and builds out its portfolio of renewables.

Overall, Duke has one of the stronger growth profiles in the sector. By focusing on regulated activities in regions with solid demographic trends and constructive regulatory frameworks, the electric utility giant seems likely to remain a reliable dividend growth investment for the foreseeable future.