We are lowering our fair value estimate for the firm, but our narrow-moat rating remains unchanged.
We are lowering our Duke Energy (DUK) fair value estimate to $92 per share from $95 after it and Dominion Energy announced they are abandoning the $8 billion Atlantic Coast Pipeline, or ACP. Our narrow moat and stable moat trend ratings remain unchanged.
Removing the contribution of ACP earnings from our forecast, partially offset by the absence of the remaining capital expenditure, reduced our fair value estimate. The lack of earnings contribution reduced our five-year earnings growth estimate 100 basis points to 4.2%, now one of the lower growth rates among its peers. We had always expected lower dividend growth for Duke relative to its peers. Our expectation for 3% annual dividend growth represents a 70% payout based on our revised 2024 earnings estimate.
The move came as a surprise to us after the U.S. Supreme Court recently upheld a prior Forest Service ruling allowing the pipeline to cross under the Appalachian Trail. While we thought the remaining regulatory obstacles were manageable, management noted the recent ruling by a federal judge in Montana on Nationwide Permit 12, a permit relied on heavily to build pipelines, and a subsequent federal ruling making an appeal unlikely, created too much regulatory and financial uncertainty for a pipeline that was already double its initial projected $4.5 billion to $5.0 billion cost. Duke will take a $2.0 billion to $2.5 billion charge against earnings for its investment in the pipeline to date.
Management reaffirmed its $56 billion five-year investment program, which previously included ACP. We expect more information from management during its earnings call in early August before deciding whether to include the additional $2 billion in our estimate.
ACP had been an overhang for Duke. Even after our fair value reduction, Duke remains one of the cheaper regulated utilities in our coverage, trading at 14.8 times our 2021 earnings estimate with an attractive 4.7% dividend yield.
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Andrew Bischof does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.