Until five years ago, Exelon Corporation (NYSE:EXC) was an excellent investment. It was providing stable capital appreciation and dividends to its investors. After slashing its dividend by 40% in the beginning of the year, Exelon Corporation (NYSE:EXC) lost most of its charm. The company has also been affected by the fall in natural-gas prices due to which electricity prices fell.
Exelon Corporation (NYSE:EXC) is trying to expand its production capacity from gas but its main source of energy production is still nuclear, which is about 55% of the company’s total capacity. The production of energy from nuclear plants does not come cheap as the initial set up costs are huge. Moreover, due the nature of nuclear plants, it is not feasible to stop production as and when desired.
Exelon Corporation (NYSE:EXC)‘s dividend cut no doubt was strategic, as it gave the company a margin of safety and improved its debt-to-equity ratio initially, thereby helping it retain its credit rating. However, investors will not put up with a continuous decline in earnings and return in the long run.
Amidst competition
Another utility stock with a decent dividend yield of 4.4% is Ameren Corp (NYSE:AEE). The company is trying to move more into regulation, which will make it neutral toward fuel price wars, making its returns more stable. Further, the company’s success depends on how quickly it offloads its three gas centers and is able to move forward with the sale of its five coal-generated power plants to Dynegy Inc. (NYSE:DYN).
Currently, Ameren Corp (NYSE:AEE) is under a financial crunch with a heavy debt sitting on its balance sheet and a lot of regulatory pressures surround its plans of moving ahead with the sale of any of its plants. No doubt the company has some very strategic plans by moving toward regulation and offloading its merchant- generation fleet, but an air of uncertainty that surrounds Ameren Corp (NYSE:AEE) does not make it a very solid investment option.
Final words
Exelon Corporation (NYSE:EXC) is well equipped to derive benefits from the demand shifting toward clean sources of energy, but that is a thing of the future — if it is cost efficient until then. If gas prices remain flat over time, Exelon might find it hard to even survive with negative earnings. At the moment, there are no reasons for me to be willing to put this utility stock in my portfolio.
The article Will Natural Gas Overpower Exelon’s Nuclear Power Business? originally appeared on Fool.com and is written by tarun bachhawat.
tarun bachhawat has no position in any stocks mentioned. The Motley Fool recommends Exelon. tarun is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited. tarun is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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