Check Out Your Other Options Before Buying This Utility!

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Generally, utilities companies are considered to be some of the most stable, high-yielding investments in the market. However, over the past three months or so, shares of one of my favorites, Exelon (NYSE: EXC) have plunged by about 20%, which seems to be anything but “stable.” A loss like this usually means one of two things, especially when the rest of the market is performing well. It could be either a tremendous buying opportunity, or a sign of trouble and worse performance to come. With the company set to report its second quarter earnings on July 31, now seems like a good time to take another look at Exelon, and to see what other utilities might make better choices.

A bit about Exelon

Exelon was formed by the merger of PECO Energy and Unicom in 2000. The company operates utilities in Illinois, Pennsylvania, and Maryland. Exelon currently owns and operates 10 nuclear power plants, and is one of the largest competitive U.S. power generators with about 35,000 MW of capacity.

What went wrong?

While Exelon has actually been lagging the market for some time now, the recent decline began when the company reported its earnings last quarter, meeting earning expectations but falling just a bit short on revenues. The stock (as well as many other similar companies) was downgraded by several analysts, and began its fall; expert opinions on how long the low power prices are going to last seem to keep getting longer and longer. For instance, several major downgrades for utilities took place on May 28, which can be seen by the sharp fall in the above chart. Speaking of the lower power prices in the U.S., in anticipation of this trend continuing, the company cut its dividend significantly in February from $2.10 annually to $1.24. 

Going forward

Now that the company has a sustainable dividend, yield should no longer be a concern for investors. In fact, since the share price is lower, Exelon yields 3.9% even with the lower dividend. The company plans to retire many of its coal-fired power plants by the end of 2015, which should help the company’s efficiency and margins, regardless of power prices at the time. 

The numbers

After the declines, Exelon trades at just 12.6 times this year’s expected earnings, but things are expected to get worse before they get better for the company. The consensus calls for earnings to drop by 6.4% in 2014 before beginning to rebound the following year. As I have said already, I think Exelon will be just fine over the long term, but let’s take a look at a few other utility companies to see if they are experiencing similar issues, or if one of them looks like a better investment.

A few others that may be better for you: NextEra Energy and Southern Co

NextEra Energy (NYSE: NEE) had a similar dip in share price around the downgrades in late May (see chart), but since then shares have risen significantly. Formerly known as Florida Power & Light, NextEra provides electricity to most of Florida’s eastern and southern areas, and generates most of its power by natural gas, with a smaller nuclear operation. Lately, NextEra has made considerable investments in wind and solar power development, and in fact are seen as the national leader in this area. Unlike Exelon, NextEra has increased its dividend every single year in recent history, currently yielding about 3.1%. While this is somewhat lower than Exelon’s yield, bear in mind that it represents a payout ratio of less than 60%, while Exelon’s has been much higher in recent years.

Southern Co (NYSE: SO) has a chart that is closer to Exelon’s in terms of recent losses, although shares have lost a less drastic 7% from peak levels. The company is one of the largest electricity producers in the U.S., currently serving 4.4 million customers in Alabama, Georgia, Florida, and Mississippi. While not quite as much of a technological leader as NextEra, Southern looks pretty attractive at the current levels, with a 4.5% yield and rising earnings. The company has an excellent track record of raising its dividend, but remember that its payout ratio is generally in the 70-80% range.

Final thoughts

While I do believe that Exelon will do well over the long term, there certainly appear to be better options out there right now for people who want utilities exposure in their portfolios. Either of the other two companies mentioned (or both) would make a great addition to any portfolio, and each has its own qualities that make it a winner. As far as Exelon goes, my current attitude is “wait and see,” although a sub-par quarter this time could result in a much more attractive entry point that may make it worth overlooking the company’s past performance. 

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Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Exelon and Southern Company. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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