Is Duke Energy the Right Stock to Retire With?

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Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Utilities are traditional bastions of stability and security for retirement investors. But the market meltdown a few years ago showed that even conservative investments can create some significant losses. With Duke Energy (NYS: DUK) having spun off its Spectra Energy (NYS: SE) pipeline business back in 2007 to focus on its core utility segment, can investors count on the utility to get the job done? Below, we'll look at how Duke Energy does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Duke Energy.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$27 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

4 years

Pass

Free cash flow growth > 0% in at least four of past five years

2 years

Fail

Stock stability

Beta < 0.9

0.36

Pass

Worst loss in past five years no greater than 20%

(21.7%)

Fail

Valuation

Normalized P/E < 18

16.31

Pass

Dividends

Current yield > 2%

4.9%

Pass

5-year dividend growth > 10%

4%

Fail

Streak of dividend increases >= 10 years

7 years

Fail

Payout ratio < 75%

63.9%

Pass

Total score

6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Duke Energy scores six points, showing that it has quite a few of the attributes conservative investors like to see in a stock. The company has the yield that most utility investors want, but Duke is about more than just dividends.

Ever since spinning off its natural gas pipeline business, Duke has focused on power generation and transmission. The company currently gets about three-quarters of its business from regulated activities like residential utility customers, which gives the company a great deal of stability in its revenue and earnings.

But Duke's long-term strategy involves growth, and it's working hard to get it. Last month, Duke's proposed merger with Progress Energy (NYS: PGN) got the approval of a key consumer group in its home state of North Carolina. If the merger goes through, the company would pass up Southern Co. (NYS: SO) , NextEra Energy (NYS: NEE) , and American Electric Power (NYS: AEP) to become the largest utility by generation capacity in the nation. With regulatory approval having stopped several similarly sized mergers from going through, however, Duke and Progress' merger is far from a done deal.

For retirees and conservative investors, the most encouraging thing about the merger is the potential for higher dividends down the road. Combined with a relatively smooth ride even in turbulent markets, Duke may be just the stock that belongs in your retirement portfolio.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

Add Duke Energy to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the "13 Steps to Investing Foolishly."

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Spectra Energy and Southern. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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