On Thursday, February 10, 2022, Detroit-based electric utility DTE Energy Company (NYSE: DTE) announced its fourth-quarter 2021 earnings results. These results were better than analysts expected as the company’s earnings per share did beat expectations but the market was most certainly not impressed as the stock’s price took a beating on the news. With that said though, utilities tend to be favored by relatively conservative risk-averse investors because of their relatively stable cash flows and finances, which we certainly do see here. The company also continued to advance on its “green” ambitions, which are something that I have discussed in various previous articles on the company. There may overall be some reasons for investors to take advance of the stock price decline and grab a 3.05% dividend yield.
As my long-time readers are no doubt well aware, it is my usual practice to share the highlights from a company’s earnings report before delving into an analysis of its results. This is because these highlights provide a background for the remainder of the article as well as serve as a framework for the resultant analysis. Therefore, here are the highlights from DTE Energy’s fourth-quarter 2021 earnings results:
- DTE Energy reported operating revenues of $ 4.647 billion in the fourth quarter of 2021. This represents a fairly substantial 50.88% increase over the $ 3.080 billion that the company reported in the prior-year quarter.
- The company reported an operating income of $ 415 million during the reporting period. This compares quite favorably to the $ 368 million that the company reported in the year-ago quarter.
- DTE Energy increased its planned five-year investment plan by $ 1 billion in an attempt to accelerate growth and execute on its “green” ambitions.
- The company revised its 2022 earnings guidance upward to $ 5.90 per share from $ 5.84 per share.
- DTE Energy reported a net income attributable to DTE Energy of $ 306 million in the fourth quarter of 2021. This represents a fairly substantial 11.27% increase over the $ 275 million that the company reported in the fourth quarter of 2020.
It seems certain that the first thing that anyone reviewing these highlights is likely to notice is that essentially every measure of financial performance improved compared to the prior-year quarter. This is not something that is especially unusual for a utility since one of its defining characteristics is financial stability coupled with slow and steady growth. The biggest reason for this is that utilities provide a product that is generally considered to be a necessity in today’s world. As such, people will generally prioritize paying their utility bills ahead of other more discretionary expenses during times when money gets tight. This same characteristic also makes companies like this relatively resistant to changes in the economy. DTE Energy, for example, handled the economic lockdowns of 2020 and the ensuing recession with ease, particularly when compared to companies in many other industries. The growth that utilities enjoy comes primarily from two separate sources. The first of these is population growth, which is incredibly slow at best and is completely out of the utilities’ control. The second way is by raising their prices, which is the primary growth engine for utilities. DTE Energy did get to benefit from price increases during 2021.
The primary way in which DTE Energy increases its prices is by growing its rate base. The rate base is the value of the company’s assets upon which regulators allow it to earn a specified rate of return. As this rate of return is a percentage, any increase in its rate base allows the company to increase the price that it charges its customers in order to earn that specified rate of return. The usual way in which this is accomplished is DTE Energy investing money into upgrading, modernizing, and possibly expanding its utility infrastructure in order to increase its value. As I mentioned in my last article on DTE Energy, it has been doing exactly this, which is the biggest reason for the growth that we saw this year. The company is planning to continue doing this going forward as it plans to spend approximately $ 15 billion on infrastructure investments over the 2022-2026 period. This is an increase over the $ 14 billion that the company originally planned to spend over the 2021-2025 period:
One of the areas in which DTE Energy will be spending this money is the preparation for the increasing adoption of electric vehicles. This is a trend that has been widely promoted in the media and elsewhere. Indeed, we are now seeing most major automakers announce plans to manufacture or develop electric vehicles. However, few people are aware of the impact that this would have on the electric grid. To put it simply, today’s electric grid is nowhere near robust enough to support the widespread adoption of these automobiles. As we can see here, DTE Energy’s service territory alone would require the ability to supply an additional six terawatt-hours annually by 2040 to support the most optimistic projections of electric vehicle adoption:
It is admittedly questionable whether or not this sort of adoption will actually happen, as I have pointed out numerous times in the past. DTE Energy is largely proceeding as though it will though and either way even a smaller-scale adoption will significant investments to improve grid stability and capacity. Along those lines, DTE Energy announced a partnership with General Motors (NYSE: GM) to further the adoption of electric vehicles, although no real details on this deal have been released as of yet.
A large percentage of the company’s planned capital investments is being designated toward “greening” its operations. As I have stated in many previous articles, DTE Energy has the stated goal of achieving net-zero carbon emissions across its operations by 2050. This is a goal shared by many utilities, although a few of them are being much more ambitious than this. Thus, it makes sense that one of the first places for the company to start is by retiring its old coal-fired power plants since they are more heavily polluting than any other form of power generation. DTE Energy is doing exactly this. During 2021, DTE Energy retired the River Rouge coal-fired power plant, which it replaced with a total of 535 megawatts of wind and solar generation. The company also announced in its earnings release that it will be ceasing the use of coal at the Belle River Power Plant by 2028. DTE Energy did not state what would be replacing the lost capacity but it will most likely be some combination of renewables supplemented by natural gas turbines, as is the company’s common strategy. The use of natural gas as a supplementary power source is necessary because of the reliability problems with renewables. These problems will eventually be overcome but that is not expected to happen within the next two decades or so.
DTE Energy has delivered earnings per share growth averaging 7.2% annually since 2010. The company expects that its capital investment program, which was just discussed, will allow it to grow its earnings per share at a 5% to 7% compound annual growth rate over the 2022 to 2026 period. When we combine this with the company’s 3.05% dividend yield, DTE Energy appears positioned to deliver investors an 8% to 10% average total return over the next five years, which is not bad for a conservative electric utility.
In conclusion, investors should be generally pleased with these results. The company is showing that it is living up to the thesis of delivering long-term growth that I have presented for it in past reports. The firm is also very aggressively working towards expanding its renewable generation capacity, which is something that is likely to appeal to certain investors and may help provide support for the stock price over the long-term. We also see a bit of an expansion on the company’s plans to support the adoption of electric cars, which may present a profitable opportunity for it even though I doubt that the adoption will be as strong as the company expects. Overall, there is a lot to like here and the company may be worth further research.