Does This Stock Have the Power to Generate Increasing Dividends?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I’m on a personal quest to find the best utility company to add to my portfolio. I like their big dividends and stable returns. Once I’ve selected my dividend dynamo, I’ll be adding shares to my virtual “No Drip, No Mess” portfolio which seeks income to then be reinvested in growth companies. I’ll also be adding shares to my own personal portfolio once trading rules allow.
Since I’m not too familiar with utilities other than I pay my own way too much, I’ll be reviewing several of the biggest before narrowing down my choice. Last time took a look to see if Dominion (NYSE: D) could power my portfolio. In this episode I’ll be reviewing Exelon (NYSE: EXC) to see if they have the power to generate increasing dividends.
Exelon is one of the largest competitive integrated energy companies in the US. Earlier this year they completed their merger with Constellation to create a company with $74.5 billion of assets, upon which they generate $32.7 billion of revenue. Exelon operates three business segments: Generation, Competitive Energy Sales and Transmission & Delivery. Let’s take a quick look at each segment.
Operating under the Exelon Generation banner, this unit is comprised of one of the largest merchant fleets in the nation with 35 GW of capacity. They operate one of the largest nuclear fleets in the world at 19 GW to go with 10 GW of gas generation and another 1 GW in their renewable portfolio. Together they form the largest clean merchant generation portfolio in the nation. They are continuing to build out their renewable portfolio adding 400 MW of wind projects this year and 150 MW of solar by the end of next year.
Exelon is best known for their nuclear fleet and a look across the industry shows why. Dominion for example has just 6 GW of nuclear capacity. NextEra Energy (NYSE: NEE) which like Exelon has a large clean merchant fleet is comparable to Dominion with 5.7 GW of nuclear generation. Other large utilities like Duke (NYSE: DUK) have less than half the nuclear capacity of Exelon while Southern Company (NYSE: SO) has just three plants, one of which they are currently expanding.
Competitive Energy Sales:
Keeping the Constellation name this unit is a leading competitive energy provider with 1.1 million customers. For context, Dominion’s retail business has 2.1 million non-regulated customer accounts. The business serves more than two thirds of the fortune 100 companies in the US which is a good indication of their importance in the marketplace.
Transmission & Delivery:
The final business segment operates three regulated utilities: BGE, ComEd and PECO. Together they are one of the largest gas and electric companies in the nation with 6.6 million customers and generate stable cash flow. Separately BGE services 1.2 million electric and 0.7 million gas customers in the Baltimore area, ComEd services 3.8 million electric customers in Chicagoland and PECO takes care of 1.6 million electric and 0.5 million gas customers in Philly.
They compare well to other utilities in terms of the customer base to other large utilities. NextEra’s Florida Power & Light has 4.6 million customers, Southern has 4.4 million, Dominion has 2.4 million while Duke is by far the largest at about seven million.
Finances and Dividend:
All of these assets work together to enable Exelon to generate between $2.55 and $2.85 in earnings per share this year which includes earnings from their now closed Constellation merger. Over the next few years they expect the merger to generate several hundred million dollars in synergies. They are investing heavily in both their utility and generation platforms and this year they see cash flow from operations at $5.9 billion but will be spending $6.3 billion on CapEx. They do have plenty of access to capital to pay their $1.7 billion in dividends but with similar CapEx requirements over the following two years there isn’t a lot of reason to expect a boost.
Speaking of that dividend, Exelon currently pays a $2.10 a share giving it a yield of nearly 5.75%. While that seems like a lot, they have been paying the same dividend rate since 2008. To me the fact their dividend hasn’t grown in several years is a big turn off and given their heavy CapEx needs I don’t expect things to change any time soon.
Back to my original question, does Exelon have the power to generate increasing dividends? From what I can see the answer is no, at least not yet. I could be wrong but I wouldn’t expect them to boost the payout for at least the next couple of years. As I’m looking for a steadily growing payout I’ll be idling any thoughts of investing in Exelon until they can begin to generate some growth in their dividend.
latimerburned has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Dominion Resources, 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.If you have questions about this post or the Fool’s blog network, click here for information.