This is not a drill; please proceed in an orderly fashion away from this stock. I wish there was an announcement like this to warn investors when they are about to buy a stock that isn’t going to make them money. However, until someone devises a system to warn investors, we can only go by the numbers, and sometimes our gut feelings about a company. What I’m here to tell you is, based on the numbers and my gut feeling, Exelon Corporation (NYSE:EXC) investors are in for more pain.
My own experience
I used to own Exelon Corporation (NYSE:EXC), and I loved the stock’s yield. Admittedly, I was caught off guard when the company announced its dividend cut. However, when I looked at the situation more carefully, I could see my mistakes.
Exelon Corporation (NYSE:EXC) was a company with a lower debt-to-equity ratio than its peers, and I assumed that made the stock safer. At the time, the company was producing positive free cash flow, and looking at analysts’ projections for EPS growth of about 5%, I figured a 7% yield and a 5% growth rate would give me a nice 12% combined return.
You know that old saying…
The problem with my assumptions were several fold. First, I assumed that Exelon Corporation (NYSE:EXC)’s yield of 7% would hold up. Second, I assumed that the company would be able to grow their earnings. Third, I assumed that a lower debt-to-equity ratio meant that the dividend was safer. Unfortunately, none of these assumptions came to fruition.
The old saying, “if it sounds too good to be true, it probably is,” applies perfectly to Exelon Corporation (NYSE:EXC). The 7% yield I was expecting turned into a yield of about 4% if you bought shares today. In fact, Exelon Corporation (NYSE:EXC)’s yield is the first reason to avoid the stock. With peers like Consolidated Edison, Inc. (NYSE:ED) paying about 4.4%, Duke Energy Corp (NYSE:DUK) paying 4.6%, and The Southern Company (NYSE:SO) paying about 4.7%, why would you accept a lesser amount?
The second reason to avoid the stock is, the company carries the only negative expected growth rate of the bunch. Analysts expect 2.27% EPS growth from Consolidated Edison, Inc. (NYSE:ED) over the next few years, 4% from Duke Energy Corp (NYSE:DUK), and almost 5% EPS growth from The Southern Company (NYSE:SO) Compare these numbers to an expected decline of 3.4% at Exelon, and you can see the company has problems. To put this in plain English, today’s total expected return (yield + EPS growth) from Exelon is a measly 0.60%. Why anyone would invest in the stock market for a 0.60% return is beyond me.
All that talk
Several articles have suggested that Exelon might be a good play in the future, because their large nuclear assets could be considered a play on “clean energy.” There is just one big hole in that theory, no one cares if it isn’t cost efficient.