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Market Pricing (2/16/2017): $78.90/share; ST-Target: $105/share; NIV: $145/share
Poised for growth in both earnings and dividend; strong strategy
We were disappointed that DUK didn’t raise its 2017 AEPS guidance, but doesn’t surprise us that DUK’s being conservative. Target 8%-10% total shareholder return with 4%-6% coming from AEPS growth through 2021 seems conservative. We believe DUK will make more transformative acquisitions on gas-side of business. Demographics picking-up momentum and now usage/customer is climbing too; we look for this to continue moving forward. Investments in renewables and gas-fired generation helps DUK move away from coal and is the right move. We expect DUK to surpass high-end of its 4%-6% AEPS CAGR through 2021 thru development of both organic natural gas projects and acquired natural gas businesses. We’re not excited about potential for industry moving towards cost-of-service gas programs. We believe another transformative gas-based acquisition is in the making within 12-18 months or by yearend 2018 that would have multiple benefits. Organic growth target for gas business is to increase its contribution in AEPS to 15% from 8% estimated for 2017. We believe this is a meaningless objective. DUK’s NOL position complicates analysis of tax rate cuts, but should be net positive.