Here are the cash king margins for four industry peers over a few periods.
|Company||Cash King Margin (TTM)||1 Year Ago||3 Years Ago||5 Years Ago|
|Exelon Corporation (NYSE:EXC)||1.4%||4.3%||16.3%||9.6%|
|Southern (NYSE:SO) Company||0.5%||7.8%||(8.9%)||(0.7%)|
|Duke Energy Corp (NYSE:DUK)||(1.3%)||(4.9%)||(6.7%)||0.7%|
|Dominion Resources, Inc. (NYSE:D)||(0.1%)||(4.7%)||(0.3%)||(28.4%)|
None of these companies comes close to meeting our 10% threshold. Exelon offers the highest margins at 1.4%, but its current margins are the lowest they have been in five years. Southern’s margins are below 1%, and have declined dramatically since last year. However, its current margins are higher than they were five years ago. Duke and Dominion both have negative cash king margins. However, Duke’s margins are the best they have been in the past three periods, and Dominion’s margins are the best they have been in the past five years. While these companies don’t offer high cash king margins, they do offer high dividends. Exelon Corporation (NYSE:EXC)’s dividend yield is 3.6%, Southern’s is 4.3%, Duke’s is 4.4%, and Dominion’s yield is 4%.
Exelon Corporation (NYSE:EXC)’s involvement in nuclear, renewable, and fossil-fuel energy helps shield it from major shifts that harm any given area. For example, while the creation of new regulations requiring energy companies to convert coal-fired plants to gas-fired plants looked like they would level a major hit on companies focused on fossil fuels, like Southern and Duke, Exelon Corporation (NYSE:EXC)’s diversification shielded it from some of these threats. However, that competitive advantage was largely removed due to significant declines in the price of natural gas, which helped rivals lower production costs and make up for the financial hit leveled by the new environmental regulations. Dominion has also been able to take advantage of the boom in natural gas due to its involvement in delivering gas to individuals through its utility business and its ownership of natural gas pipelines and storage systems, which has allowed it to take advantage of Utica shale production.
The cash king margin can help you find highly profitable businesses, but it should only be the start of your search. The ratio does have its limits, especially for fast-growing small businesses. Many such companies reinvest all of their cash flow into growing the business, leaving them little or no free cash — but that doesn’t necessarily make them poor investments. Conversely, the formula works better for slower-growing blue chips. You’ll need to look closer to determine exactly how a company is using its cash.
Still, if you can cut through the earnings headlines to follow the cash instead, you might be on the path toward seriously great investments.
The article Is Exelon a Cash King? originally appeared on Fool.com.
Jim Royal owns shares of Southern Company and Exelon. The Motley Fool recommends Dominion Resources, Exelon, and Southern Company.
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