What Has Been Going On?
Exelon Corporation (NYSE:EXC) reported an increase in revenues of 23% during 2012; however, a surge in operating costs lead to lower reported net earnings of $1.16 billion. The reported consolidated revenues can be broken down into 4 core operations: Generation, ComEd, PECO and BGE. The Generation segment is the largest contributor towards total revenues at 48% — PECO and ComEd both contribute roughly around 32% and face the problem of falling production. On the other hand, the BGE segment is reporting losses due to unfavorable commodity prices and surging costs.
The company increased its asset base by 3% during the last year after the merger with Constellation Energy, which made Exelon Corporation (NYSE:EXC) a massive presence in the utility sector. The idea was to derive operational synergies thereby achieving a competitive advantage over the new entrants.
Future Prospects and Dividend
Exelon Corporation (NYSE:EXC) caters to a wide base of commercial and household sectors. The company has diversified its operations into renewable sources of energy and has heavily invested in environment-friendly technology to mitigate environmental risks. The company is decided to invest $650 million in PECO, which will upgrade its metering technology. PECO will install new metering technology with its 1.6 million customers over the next decade, which will help the company efficiently manage and operate its products and services.
According to Energy infrastructure modernization act (EIMA), ComEd will invest $2.6 billion over the next 10 years — $1.3 billion will be spent of strengthening the electricity system and $1.3 billion on adding new smart grid and advanced meter technology. These projects are expected to generate higher earnings in the future by greatly reducing operational costs.
Exelon Corporation (NYSE:EXC) cut its dividends by 41%, which had a negative impact on the stock price as the company was a major attraction due to attractive dividend yield. At the moment, Exelon Corporation (NYSE:EXC) pays a quarterly dividend of $0.31 per share, and yields 3.50%. Overall, the stock price is about 8% below the levels it was a year ago, recent recovery of over 10% was vital in reversing heavy losses the stock price took in October last year.
Other Attractive Dividend Investments in the Energy Sector
Duke Energy Corp (NYSE:DUK) is an important player in the energy sector, and the stock has gained over 12% during the past twelve months. The company’s merger with Progress Energy has put it among the top players in the sector.
However, mergers do not usually offer instant rewards, and investors will have to wait for the full benefit of the merger. Overall, the merger will allow the company to grow considerably in this saturated and slow growth sector. Duke is one of the biggest energy producers; however, the company, just like other big boys in the sector, faces the risk from smaller energy producers.
At the moment, Duke Energy Corp (NYSE:DUK) pays an annual dividend of $3.06 per share, yielding 4.17%. The company has a long history of increasing dividends, and remains an attractive pick for the income investors.
The Southern Company (NYSE:SO) has not shown explosive price appreciation like Duke Energy Corp (NYSE:DUK); however, the company has been able to grow its revenue consistently, albeit in the low single digits. The company has massive-scale operations and enjoys substantial diversification in its operations.
Furthermore, the company is one of the best dividend payers in the market; it recently increased its annual dividend to $2.03 per share, yielding 4.30%. Southern has decreased its dependence on coal, and the company is investing towards clean energy sources in order to further diversify its portfolio.
Conclusion
Utility companies have considerable control over pricing and have strong position in the respective markets. Recent unfavorable commodity price movement is not expected to last, and the diversification efforts of the company should provide it considerable cover against the business risk. Considerable control over pricing and favorable movement in commodity prices should allow the company to continue with the current dividend rate.
The two companies mentioned above are yielding more than Exelon Corporation (NYSE:EXC); however, I believe those two have less price appreciation potential than Exelon does. As a result of its fall in price, Exelon’s stock is still trading substantially below the previous high, and offers substantial upside potential, in my opinion.
The article Should You Buy Exelon? originally appeared on Fool.com and is written by Ishtiaq Ahmed.
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