The Executive Suite Isn’t the Only Mess at Duke Energy: Beware Your Dividend and its Growth
If you’re rubbernecking the CEO pile-up at Duke Energy (DUK), you need to know that the future of Duke as a reliable source of dividends is lost, at least temporarily, in the wreckage.
Moments after Duke closed its recent acquisition of Progress Energy, the board reneged on an agreement to place Progress CEO Bill Johnson in charge. Instead, Duke CEO Jim Rogers got the job. The fall-out from the extraordinary switcheroo includes fresh regulatory investigations of the deal and demoralized employees at Progress. The incident should prompt long-term investors to look again at whether the Charlotte, N.C.-based Duke/Progress combination is a case of two wrongs in the electric utility industry trying to make a right.
The origins of CEO squabble date back to 2007, when newly installed Duke CEO Rogers divested the company’s Houston-based natural gas business, which trades today at Spectra Energy (SE). After spinning off Spectra to Duke shareholders, Duke’s total assets dropped by 28% to less than $50 million, concentrated in coal and nuclear generating capacity. Spectra shareholders, in turn, owned a key player in the fast-emerging natural gas pipeline sector. Duke’s asset growth trend has been erratic, especially when compared to electricity peer Southern Company (SO).
Ever since the Spectra spinoff, Rogers has been trying to rebuild Duke’s asset base, which is the essential driver of utility company performance. The $26-billion Progress acquisition does so, adding $$35 billion in total assets to Duke’s $62.5 billion. Apparently, Rogers wants to see his asset gathering bear fruit for Duke investors. But it’s not clear that shareholders expecting reliable performance in return on assets will be pleased.
Neither Duke nor Progress has excelled in turning their assets into profits. The record suggests Duke shareholders would have been better off if Rogers had not disposed of Spectra.
The explanation for flagging return on assets at Duke and Progress lies in weak growth in cash from operations at both companies.
Duke and Progress blamed mild weather for the recent results. Duke posted a $420 million pretax charge in the first quarter regarding a troubled coal gasification project in Indiana. Operational problems have boosted both companies’ dividend payout ratios to lofty levels. At least until the smoke clears on the Duke/Progress combination, the no-drama alternative for electric utility investors might be Southern Co.