Operating in a regulated power market is a great business. Selling power on the open market was a great business. Now it isn’t. That’s led to a few utility dividend cuts and some turnaround opportunities for investors.
There are basically two types of power companies, those that operate in regulated markets and those that sell electricity on the open market. Many utilities have operations in both spaces.
Regulated markets offer generally predictable revenue streams. The wild card is having to ask regulators for price increases, called rate cases. Such cases can be contentious and may actually go against the utility. Still, this type of business tends to be very reliable.
Merchant power companies that sell electricity on the open market don’t have the benefit of preset rate structures. So, they are subject to supply and demand. That can mean a windfall when electricity prices are high, but can be devastating when prices are low—like right now.
Utilities hate to cut their dividends, since that is often the most enticing aspect of their stocks. However, the current down cycle in merchant power has forced some to do just that. That has set investors up to buy utilities with turnaround potential. Here are a few to consider:
Exelon Corporation (NYSE:EXC)
Exelon Corporation (NYSE:EXC) has two sides to its business. Its three regulate utilities are Baltimore Gas and Electric, ComEd, and PECO. These are stable businesses, serving more than 6.6 million electric and gas customers. Although these utilities provide a nice base, Exelon Corporation (NYSE:EXC) is also among the largest merchant power companies in the country. That exposure in a weak power market led to a recent dividend cut.
Although no one likes to see a dividend cut, management chose to preserve the company’s credit rating and financial flexibility instead of continuing to pay its previous dividend. That move has set the company up to weather the current environment and benefit when the merchant power market improves.
What makes the company stand out, besides an over 5% dividend yield, is its nuclear power fleet. Exelon Corporation (NYSE:EXC) is the largest nuclear power company in the U.S. market. So, it has the ability to produce relatively low cost electricity. It also has a major head start on the emissions front, since nuclear is among the cleanest power sources.
With a strong core business, a collection of enviable nuclear plants, and a right-sized dividend, Exelon Corporation (NYSE:EXC) would be a good choice for all but the most conservative investor.