The company’s nuclear assets are actually the third reason to avoid Exelon. The company reported less planned and unplanned outage days, but cited “high nuclear fuel costs” as a primary reason for their earnings decline. Of their peers, only Duke Energy Corp (NYSE:DUK) saw an earnings decline in the last quarter, and that was primarily due to merger expenses. With Exelon reporting declining earnings and their peers growing, it looks like the analysts are right in expecting this decline to continue.
The numbers don’t lie
Everything else might be up for debate, but none of it matters if the company can’t turn their income and cash flow situation around. This brings us to the fourth reason investors should avoid the stock, the company’s interest expense is sky high compared to their peers.
Just as an example, The Southern Company (NYSE:SO) pays about $0.24 of each $1 in operating income towards interest. Consolidated Edison pays $0.27 of each $1 toward interest, and Duke Energy Corp (NYSE:DUK) pays about $0.30. By comparison, Exelon paid $1.23 of every $1 in operating income towards interest. When a company has to pay more in interest than they generate in operating income, you know there won’t be much left for shareholders.
The last reason to avoid Exelon comes from their cash flow statement. In the last quarter, the company generated a negative $429 million in core free cash flow. Core free cash flow is simply the company’s net income, plus depreciation, minus capital expenditures. Considering Exelon’s size, this was particularly troubling because their larger competition did much better.
Duke Energy Corp (NYSE:DUK) is a much larger company, yet they generated negative core free cash flow of $319 million. To make things worse, both Consolidated Edison, Inc. (NYSE:ED) and The Southern Company (NYSE:SO) reported negative core free cash flow of about $90 million. To put it another way, Exelon’s peers outperformed the company by 25% to 78% when it comes to free cash flow.
The bottom line is, not only does a dividend cut look likely, but the dividend could be eliminated completely. Ask yourself how much the company can afford to pay if they are burning through cash, and already have much higher interest costs than their peers? Considering the stock’s combined total return is only 0.6% today, imagine how scary that number becomes if the dividend is axed again. Actually, don’t imagine it, just do yourself a favor and switch to another utility stock right now.
Chad Henage has no position in any stocks mentioned. The Motley Fool recommends Exelon and Southern Company. Chad is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article 5 Reasons Another Dividend Cut Is Likely originally appeared on Fool.com is written by Chad Henage.
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