Exelon: An Income Play With Sturdy Legs
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With U.S. Treasuries yielding less than 2%, investors have been hard pressed to find yield, often looking to high-dividend stocks. The obvious danger here is that one will focus on the dividend and miss the value-trap that the stock itself represents. One company with a strong dividend yield and a solid base for price appreciation is Exelon Corp. (NYSE: EXC).
While Exelon’s fundamental statistics are not perfect, they reveal a company with the tools to take the stock higher. Even were the stock to stagnate, with a dividend yield of 5.7% at current levels, the stock is attractive as a pure income play.
As of the company’s last earnings report, several key metrics were growing favorably. On a year-over-year basis, Exelon had revenue growth of 29.8% and growth in net operating cash flow of 42.2%, which rose to $1.74 billion. Industry averages for each of these metrics are 0.5% and 5.98%, respectively. Unfortunately, the above growth was not sufficient to allow the company to grow EPS. Furthermore, relative to its peers – discussed in more detail below – Exelon’s operating margin is only fair at 19%, although the reported industry average is 10%.
Looking at the stock’s price chart below, Exelon has traded in a very stable and predictable range for the past six months. While this is no guarantee of where the price will head in the future, it is some evidence that the price action is stable. This is further confirmed by the stock’s beta of 0.52. All other factors being equal, the fact that the stock is near the bottom of its near-term range is positive, if for no other reason than because it adds a small kicker to the dividend yield carried by the company.
Overall, utilities have been mixed over the past year, picking up somewhat in the last few months. On a relative valuation basis, Exelon’s P/E of 15.9 is solid, but not overly impressive relative to several of its peers. Ameren Corp. (NYSE: AEE) trades at a multiple of 68, PPL Corp. (NYSE: PPL) is trading at 10, Duke Energy Corp. (NYSE: DUK) trades at 58 and American Electric Power (NYSE: AEP) is at 10.4.
Each of these competitors have positive performance over the past six months (see chart) relative to Exelon, which is down about 5%. This divergence is one of the reasons that the yield offered by Exelon is higher, and why the company appears to be at a better entry point. At its current valuation, PPL looks attractive as well, but the company’s high level of debt and erratic earnings stream make it a second choice.
An additional concern for PPL is the institutional activity in the stock. Despite its attractive valuation, trading just a few percent below its 52-week high, profit taking has led to net institutional sales of nearly 30 million shares thus far this quarter; this is over 5% of the company’s shares outstanding.
American Electric Power, which also is attractive as a pure valuation play, is trading just below its 52-week high as well. Hedge funds and large institutional traders have rung up net sales of over 25 million shares this quarter; this, again, is over 5% of the company’s outstanding shares. It is difficult for a stock to perform without institutional support and begs the question as to where these investment dollars are flowing.
Given the combination of factors, Exelon offers investors a compelling income argument at current levels. The fundamental metrics of the stock look solid and while they do not indicate any serious mispricing, they support a stable outlook. If the company remains in its current range, the stock has reasonable upside potential and limited downside risk. While some of Exelon’s peers are interesting as well, most notably PPL, the combination of high valuations or heavy institutional selling eliminate them as top picks under current conditions. Anyone looking to add a solid income element to their core portfolio should be well served by considering Exelon.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.