Until five years ago, Exelon Corporation (NYSE:EXC) was an excellent investment. It was providing stable capital appreciation and dividends to its investors. After slashing its dividend by 40% in the beginning of the year, Exelon Corporation (NYSE:EXC) lost most of its charm. The company has also been affected by the fall in natural-gas prices due to which electricity prices fell.
Exelon Corporation (NYSE:EXC) is trying to expand its production capacity from gas but its main source of energy production is still nuclear, which is about 55% of the company’s total capacity. The production of energy from nuclear plants does not come cheap as the initial set up costs are huge. Moreover, due the nature of nuclear plants, it is not feasible to stop production as and when desired.
The drop in gas prices has affected Exelon in a major way because of the company’s concentration being mainly toward nuclear energy. Further, natural-gas generators are cheaper to construct and operate than a nuclear plant, making power generation more profitable especially when gas prices are low. If the same situation continues, Exelon Corporation (NYSE:EXC) will find it hard to survive as electricity will be available from other sources.
A few analysts believe that the scenario might change in Exelon’s favor if the energy department approves for more export terminals to ship gas overseas. With increased exports, what would happen is that gas prices would increase. If gas prices become inflated, the operating cost of energy generation from natural gas would increase without affecting Excelon’s cost of production. I strongly believe that there won’t be any major approval for export terminals that can potentially prove a boon for Exelon in the near future.
Exelon Corporation (NYSE:EXC)‘s dividend cut no doubt was strategic, as it gave the company a margin of safety and improved its debt-to-equity ratio initially, thereby helping it retain its credit rating. However, investors will not put up with a continuous decline in earnings and return in the long run.
Amidst competition
Though Exelon has slashed dividends, another utility player and competitor, PPL Corporation (NYSE:PPL), is currently paying a yield of 5%, which makes it a safe bet for income investors. The company has a long history of increasing its dividend payments gradually, so investors can be sure that their dividend income is here to stay.
While Exelon is currently returning 8.4% operating margins to its total sales, PPL Corporation (NYSE:PPL) enjoys a 28.2% margin. In the last couple of years PPL has had some major regulatory wins in the U.S. and U.K. that have improved its position and further, its ongoing earnings too have surged 19%.
Compared to Exelon Corporation (NYSE:EXC), PPL Corporation (NYSE:PPL) is less concentrated towards nuclear energy placing and is concentrated more into wind energy and natural gas. The company is thus in a better position to extract some additional benefits of falling natural-gas prices. It is moving more toward clean and renewable energy as it has completed a hydroelectric expansion project in Montana, which increases its capacity by around 70% of its current renewable capacity. PPL no doubt is headed strong into the future.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
You can enter your email below to get our FREE report. In the same report you can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12-24 months. We initially share this idea in October 2018 and the stock already returned more than 150%. We still like this investment.
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