If a company that pays a huge dividend slashes it, investors tend to panic. But are dividend cuts always bad? I would say no, as in the last quarter when Exelon Corporation (NYSE:EXC)’s management reduced their dividends by 41%, it was a smart move. It made available $700 million for the company. The company’s performance has benefited from its shrewd decision making that can be gauged by the fact its shares have surged 25% in the last year.
A good quarter
The company reported a revenue of $6.98 billion in the first-quarter of 2013, 11% higher than the consensus estimates of $6.2 billion. On year-to-year basis the top line grew by 47% from 2012’s first quarter before the Exelon Corporation (NYSE:EXC)’s merger with Constellation. Although, compared to the same period last year the company’s adjusted EPS is down by 17.6% to $0.70, it was better than the analysts’ expectation by $0.02.
Exelon Corporation (NYSE:EXC) has been concentrated mainly on nuclear energy and produces about 20% of the nation’s nuclear energy. Nuclear plants are incredibly capital intensive and the new regulations make starting a new plant unfeasible, as the prices of nuclear energy in deregulated markets continue to be low. Thus, I believe the company spending $13.5 billion in upgrading its power grids run by regulated utilities along with planning to boost the generation capacity of its nuclear plants is a smart step.
Further, the company may invest $3 billion in the next five years in natural gas exploration, solar farms and other projects in order to diversify its growing portfolio. As Exelon Corporation (NYSE:EXC) mainly generates energy through nuclear plants, the previous cheap natural gas prices have made investors think before investing in the company. As natural gas prices are increasing, and are expected to further rise for nearly the next two and a half decades, nuclear energy would become more affordable in the long-run, since it’s cheaper to produce.
Exelon Corporation (NYSE:EXC), apart from producing power also trades in electricity, i.e. it buys and sells electricity through other service providers. Exelon is thus well placed to fully exploit the difference in price between gas and nuclear power, and hedge itself to rising and falling prices.
A look into the competitors
PPL Corporation (NYSE:PPL) also reported its earnings recently. The company reported its EPS at $0.71 a share, compared to $0.70, 1.4% higher from a year ago period. The company’s Electric Utilities Unit will be investing around $1 billion, in order to upgrade its transmission and distribution systems. The upgrade will result in providing 1.4 million consumers with uninterrupted supply of power. Moving ahead this year the company has projects in the pipeline that will minimize duration and size of outages too.
PPL Corporation (NYSE:PPL) has made a number of acquisitions last year, which should improve its operational control of additional combined-cycle gas generation. Further, the company has consistently increased its pay-out in the last 12 years and this practice does attract investors towards it. As the company is currently priced near its 52-week high, I would recommend investors to hold their stocks and invest if the prices drop from here.