“The recent merger of Exelon Corporation (NYSE:EXC) and Constellation Energy has made us the number one competitive energy provider, with one of the cleanest & lowest-cost power generation fleets and one of the largest retail customer bases in the United States. Exelon has a solid platform to pursue its continued commitment to sustainable growth and competitive markets, helping drive customer choice, innovation and efficiency,” said Christopher M. Crane President and CEO, Exelon Corporation (NYSE:EXC).
What, when and why?
Exelon, an electricity and natural gas distributor giant released its first quarter earnings on May 1. Being the leading U.S power generator and operating in 47 states, Exelon Corporation (NYSE:EXC) owns the nation’s largest nuclear fleet of about 19,000 megawatts, totaling its power generation capacity close to 35,000 megawatts.
The reported earnings beat both top and bottom-line expectations. It reported revenue of $6.98 billion in the first quarter of fiscal year 2013, which is an 11% increase from the consensus estimates of $6.2 billion. Previously, the company had announced a dividend policy that was later approved by the board in the first quarter of 2013. Based on this policy, the Board of Directors declared a regular quarterly dividend of $0.31 per share which is payable on June 10, to shareholders.
Exelon cut its dividends by 41%, and made a smart move. It did have a negative impact on the stock price, as the company was a major attraction due to its alluring dividend yield. But are dividend cuts always bad? The answer is no. Although the company currently pays a quarterly dividend of $0.31 per share, this shrewd decision making has awarded Exelon Corporation (NYSE:EXC) with $700 billion and made its shares surge 25% in the last year.
The main reason behind the dividend cut is to preserve the company’s credit rating and financial stability instead of paying its previous dividend. As Exelon Corporation (NYSE:EXC) operates both regulated and unregulated utilities, it wanted to stabilize its unregulated arm, which has been suffering under a weak power market. Through this, the company is trying to position itself to handle the tough merchant power market.
Overall, the stock price is about 8% below the levels it was a year ago, but analysts are optimistic about 2015, anticipating the earnings to stabilize around $2.25.
The Merger and its effects
According to the company’s statements –
Exelon Corporation (NYSE:EXC) and Constellation completed their merger on March 12, 2012. We are now the largest competitive integrated energy provider in the United States. This transaction offers clear financial upside for both sets of shareholders. It is anticipated to be break-even to Exelon’s adjusted earnings in 2012; in 2013, it is expected to be accretive to earnings by more than 5%.The market capitalization of the combined company will be $34 billion with an enterprise value of $52 billion.
There has been a mixed effect with the merger. Checking on the year-to-year basis this year’s top line grew by 47%, whereas the adjusted EPS was down by 17.6% to $0.70, compared to 2012’s first quarter. The merger synergies did not meet their expected mark, and misjudged hedges resulted the company to take a $235 million one-time hit. The dividend stock is up 18% over the last quarter, and the company has increased its asset base by 3% post the merger, thereby making a massive presence in the utility sector.
The basic idea behind the merger was to derive operational synergies in order to achieve a competitive advantage over the new entrants and the company has been quite successful in achieving it. The favorable energy prices along with its current hedged position, hints at profit potential in the forthcoming months for long term investors.
Read more: Exelon and Constellation Merger
With increasing population and decreasing natural resources, one solution comes into picture. The answer is Green or ‘new-clear’ energy. Not only are these resources a solution to crunching energy resources but also environmental friendly owing to their lower carbon footprint. Exelon Corporation (NYSE:EXC) has primarily focused on nuclear energy thereby contributing to one-fifth of the nation’s nuclear energy. Exelon has played it smart by deciding not to start a new nuclear plant owing to the high capital investments but have spent around $13.5 billion in upgrading its existing power grids along with plans to boost the generation capacity of its nuclear plants.
Also, the company has a few five year plans in its kitty which would further empower and harness clean sources of energy. This will cost it around $3 billion to invest in solar farms, natural gas exploration and other projects. The company also trades in electricity and thus is looking forward to diversify its portfolio. Owing to the low production cost of nuclear energy, it is a great contender for the increasing natural gas prices. This looks like the energy solution for the near future, placing the company strong in the energy market.
American Electric Power Company, Inc. (NYSE:AEP) reported its earnings recently. It is currently valued at $22.4 billion and carries a price-to-earnings ratio of about 15.5. The reported sales were better than expected and profits were in line with the consensus estimates. It currently increased its dividend pay-out by 4.3% to $0.49 a share. The company’s geographic reach spans across 11 states from West Virginia to Texas.
Although the stock has a beta of 0.6, which displays its steadiness, the main problem lies in the fact that the company generates 66% of its power from coal which can be a reason of long-term worries once people start moving towards clean energy. Hence the company has plans of investing $3.6 billion in 2013 to diversify its operations. Looking at all these uncertainties, I would suggest to refrain oneself from this stock at the moment.
PPL Corporation (NYSE:PPL) is another utility company which reported its earnings lately. It reported its EPS at $0.71 a share, compared to $0.70, 1.4% higher from a year ago period. It has made quite a few acquisitions last year and will be investing around $1 billion in upgrading its transmission and distribution systems. This upgrade will power 1.42 million consumers with uninterrupted supply of power.
Investors are advised to hold on to the stock currently as the company is priced near its 52-week high and has consistently increased its pay-out in the last 12 years, showing a positive sign for investment.
Duke Energy Corp (NYSE:DUK) surpassed sales expectations but bottomed out on bottom-line earnings. It is valued at $48.9 billion, pays out a dividend yielding 4.4%, and carries a price-to-earnings ratio of 22.6. Owing to its steady business model, the stock possesses a beta ratio of 0.3 only. In the fourth quarter of 2012, the company possessed a profit margin of 7.6%.
Tracking the signs of synergies from the utility’s July 2012 Progress Energy merger, investors were watching this quarter’s results closely. First quarter sales signal that the partnership has proved effective. Thus from an operational standpoint, Duke Energy Corp (NYSE:DUK)’s merger moves remain on track.
Fighting the energy crunches, as the world moves progressively towards clean energy sources, Exelon Corporation (NYSE:EXC) looks perfectly positioned with a diversified portfolio in the energy market. Investors do need to keep a close watch on each utility’s performance and energy portfolio offerings. Recent spikes in natural gas prices may seem potentially lucrative, but the best investments are those that provide sustainable profits through thick and thin.
The company has good price appreciation potential. The combination of natural and nuclear energy in its portfolio helps Exelon in lowering risk thereby achieving stability. Its recent trading activity and upcoming plans should result in better margins and higher profits for long-term investors. Thus I recommend a buy at the current price, not just for a healthy profit, but also for a healthy environment in the future.
The article Go Green and get Rich! originally appeared on Fool.com.
Rishabh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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