Exelon Corporation (EXC), Atlantic Power Corp (AT), NRG Energy Inc (NRG): Merchant Power Bargains

Atlantic Power Corp (NYSE:AT)

Atlantic Power is another merchant power company. However, the crossroad this Canadian company faced was more severe than Exelon Corporation (NYSE:EXC) because Atlantic Power is far more reliant on open market electric prices. With long-term contracts set to end, Atlantic Power Corp (NYSE:AT) was forced to cut its dividend.

Essentially, new contracts would have been much less generous than the old ones, leaving it unable to pay its distribution. The cut hit the shares hard, which is where the opportunity resides. A share price in the low single digits and a dividend yield hovering around 8%, however, is an opportunity, but it is also a statement to the risks here.

The company’s new direction is to sell assets in an attempt to move more aggressively into renewable power sources. It has been actively buying and building wind farms, for example. Government mandates about cutting dangerous emissions will help create demand for electricity from such generation.

The cut should bring the company’s payout in line with its ability to grow its business and continue to pay a dividend. There is, however, no guarantee of that. So, for more aggressive investors willing to bet that the new direction works out, Atlantic Power might be a good option. And you’ll be paid well to wait for the turnaround.

NRG Energy Inc (NYSE:NRG)’s dividend is actually going the opposite direction. After exiting bankruptcy about a decade ago, the company started paying a dividend in late 2012. This despite the downturn in power prices. Although the dividend yield at around 1.4% is relatively low, newly initiated dividends tend show the greatest growth. So, this is an opportunity to get in “on the ground floor” of a well-financed utility that is just beginning to return value to shareholders.

The thing to watch at NRG Energy Inc (NYSE:NRG) is the progress of recently purchased GenOn. Estimated cost saving need to be met if the deal is to be a success. Still, middle of the road investors willing to wait for dividend growth might find this solid merchant power company worth a look.

Down and Out

Down and out sectors can be filled with good investment ideas. Every stock won’t be a buy for every investor, but taking a look around can reveal some real gems. The three utilities above are all interesting in their own way.

The article Merchant Power Bargains originally appeared on Fool.com is written by Reuben Brewer.

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