As investors continue their hunt for dividend yield in this market, many yields are coming down due to price appreciation. In addition, investors have been willing to take on more and more risk in order to juice returns in their portfolio. Investors searching for high yield with low risk should look no further than Exelon Corporation (EXC).
Exelon is a utilities holding company based in Chicago, Illinois. Exelon was founded in 1887. The company generates electricity through nuclear, fossil, and hydroelectric generation. Exelon has approximately 3.8 million electricity customers in northern Illinois and 1.6 million electricity customers in southeastern Pennsylvania, as well as 485,000 natural gas customers in Pennsylvania. The company is the largest generator of nuclear power in the United States, operating 17 nuclear reactors. Exelon generates approximately 20% of all nuclear power in the U.S.
Exelon is a dividend stock, offering a yield of 5.1%. Despite the high dividend yield, the share price has not been rewarded this year. Over the past 12 months the stock is down 7.3%. Exelon has grown its dividend at a 5.1% annualized rate over the past five years. In addition, Exelon's free cash flow has grown at an annualized rate of 9.7% over the past five years. During the same period the company increased revenues and earnings per share at an annualized rate of 4% and 22%, respectively.
| Metric | EXC |
| Market Cap | 27.3 B |
| Recent Price | $41.19 |
| Forward PE | 10.17 |
| Dividend Yield | 5.10% |
| 5 Year Div. Growth Rate | 5.60% |
| Price/Book | 2.49 |
| Price/Cash Flow | 4.96 |
| Return on Equity | 23.43% |
| Debt/Equity | 1.1 |
| Revenue TTM | $18.64 B |
| Operating Cash Flow FYE | $5.24 B |
| Capex FYE | $3.32 B |
| Capex/Cash Flow FYE | 0.63 |
| 5 Year Rev. Growth Rate | 4.00% |
| 5 Year Cash Flow Growth Rate | 9.70% |
| 5 Year Earnings Growth Rate | 22.40% |
| Net Profit Margin | 13.75% |
| Current Assets | $6.40 B |
| Return on Assets | 4.91% |
| Long-term Debt | $12.00 B |
Table Data provided by Charles Schwab & Co.
Exelon is undervalued, trading at 10.6 times earnings versus the sector trading at 17 times earnings. The stock trades at only 5 times cash flow. Even though Exelon operates in a very cost intensive business it certainly earns enough cash to sustain its dividend yield. Exelon's payout ratio is a manageable 54%. Analyst's opinion on the stock is mixed, 5 analysts rate the stock a strong buy or buy, 13 rate the stock a hold, and 4 rate the stock an underperform.
Exelon is at an advantage over competitors. Because of the large nuclear fleet its generation costs are lower. In addition, Exelon is in a good position if the U.S. Government implements carbon emissions regulation. Exelon plans to expand its nuclear generation capability by 1,300 - 1,500 MW within eight years. The expansion will occur through upgrades to the existing nuclear fleet as well as development of new projects.
Exelon is a well-run energy provider. With its nuclear fleet, the company is in an excellent position to benefit from clean energy regulation. Exelon hasn't participated in the stock market rally over the past two years. I expect this will change as investors search for higher yields. The stock offers an attractive risk/reward value. Downside risk to the stock should remain limited. Exelon will continue to grow cash flow and revenue to support its dividend. Investors should look to Exelon to power a portion of their portfolio.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in EXC over the next 72 hours.
Also, the writer needs to be careful applying a generic PE benchmark to the entire sector; you have merchant, regulated and mixed (of which Exelon is the latter). They sit in one of the worst regulatory jurisdictions (IL) and on their unreg side have capital heavily tied up in nukes at a time when gas-fired gen is dirt cheap and CO2 still seems far from being an economic factor. Could this all change? Sure, but the present valuation doesn't seem out of line with risks.
Disclosure: no positions
It is below its 20 and 50 day SMAs, and only a few pennies above its 200 day. The dividend has not been increased since Nov. 2008.
EXC has a 5-yr revenue growth rate of only 4%. Thus one must wonder if their 5-yr earnings growth rate of 22.4% may reflect significant cost savings that have run their course.
The author paints a very rosy picture, however EXC is not a small under-covered stock ...thus one must ask why EXC has not advanced in the recovery that has doubled the S&P500?
Utilities generally have high capital borrowing costs, and consequently their share prices suffer when interest rates are rising (or expected to rise).
What does it mean that the utility index has significantly outperformed EXC...for the last 2 yrs, the index is up 20%, and EXC down -15%...for the last year, the index is up 8%, and EXC down -8%...for the last month, the index is down -1%, and EXC is down -4%...why is that?
Certainly EXC is cheap. Does that mean it is a good value?
According to Yahoo, 22 analyst cover EXC, together they rate it a 2.8 of 5.0 (which is a hold at best, and is by no measure a good rating.
I may sell EXC after the next dividend payment. I'm looking at PNY as a replacement. The yield is a little lower but they have a long history of increasing dividends. Their streak is at 31 years and counting. They are due to announce another increase, I believe.
What I like about PNY is that if you reinvest the dividends, you get a 5% discount on the share price. That adds up over time as it allows you to get more bang for the buck by purchasing additional shares.
A couple of other companies that I own who provide a 5% discount on the purchase price if you reinvest are EPD and HCN.
Someone mentioned pension underfunding. Another mentioned a tough regulatory environment in Illinois, perhaps there is a large amount of cap-ex that is looming with the aging nuke fleet?
If this were indeed a good buy, one would think that just ONE well known utility analyst would come to the fore and issue a strong buy recommendation?