Exelon and First Energy Stocks Slump [1 Attachment] Kevin Kamps comment: May FirstEnergy slide into oblivion -- without dragging the rest of us with it. Of course, it could also convert to efficiency, wind, solar, etc., and avoid all this trouble. But it doesnt seem very interested in doing that. Arnie Gundersens comment: The main draw of utilities is the high dividend yields they pay to their investors. But these companies arent making enough to sustain the high dividend paychecks. In the first quarter, FirstEnergys earnings per share reached $0.29, while its dividend per share was $0.36. Exelons EPS reached only $0.1, while its dividend was $0.31 per share. Even these companies operating cash flows dont cover the dividend payments. As a result, Exelon and FirstEnergys debt levels increased in the past year by $0.5 billion and $1 billion, respectively. Why Exelon and FirstEnergy Are Sliding By Lior Cohen | More Articles July 19, 2014 | Comments (3) Shares of FirstEnergy (NYSE: FE ) and Exelon (NYSE: EXC ) have declined in the past month by more than 6% and 9%, respectively. If youre chalking it up to the U.S.s plan to reduce carbon emissions by using less coal, which could lead to higher operating costs for utilities, then this reasoning doesnt hold up for Exelon. This company mostly uses nuclear power to generate electricity. So, lets consider the following factors that could be behind these companies recent falls. Bullish market As stated by a Foolish colleague, the recovery of the financial markets, including the S&P 500, is driving investors toward higher-risk assets and away from less risky assets such as utilities. If the bullish trend continues, investors are likely to look for growth companies and less for stocks offering high dividend yields and little to no growth in value. This also brings up another point: Will utilities dividend yields remain high? Rise in debt and borrowing costs The main draw of utilities is the high dividend yields they pay to their investors. But these companies arent making enough to sustain the high dividend paychecks. In the first quarter, FirstEnergys earnings per share reached $0.29, while its dividend per share was $0.36. Exelons EPS reached only $0.1, while its dividend was $0.31 per share. Even these companies operating cash flows dont cover the dividend payments. As a result, Exelon and FirstEnergys debt levels increased in the past year by $0.5 billion and $1 billion, respectively. If their earnings dont pick up in the coming quarters, they are likely to slash their dividend payments again. Late last year, FirstEnergy reduced its dividend by 35%. Exelon also slashed its dividend payment by nearly 41% in early 2013. In such a case, these stocks will lose their appeal even further. The current market expectations are that the Federal Reserve may raise its interest rates by mid-2105. Such a change in policy is likely to lead to a slow rise in borrowing cost for companies, which will make borrowing cash less desirable for Exelon and FirstEnergy. Lower profit margins Both companies use natural gas as one of their energy sources to generate electricity. For Exelon, natural gas accounts for 22% of its input; for FirstEnergy, natural gas is roughly 8% of its total fuel mix. During the first half of this year, the price of natural gas spiked to hover over the $4.5 mark. Further, during the second quarter of 2014, coal prices also rose by almost 5%, year over year. Coal accounts for 57% of FirstEnergys fuel mix. The rise in energy prices could partly explain the drop in profitability of these companies, as indicated in the chart below. Source: Google Finance. If natural gas and coal prices remain high, they could further cut the profit margins of these companies and make them less attractive as investments. The bottom line FirstEnergy and Exelon havent done well in the past several weeks, and as long as they dont show any significant improvement in their profit margins, and the bullish run in the equities market continues, these companies stocks will keep losing their appeal, and investors will likely steer away. Top dividend stocks for the next decade The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now. Lior Cohen has no position in any stocks mentioned. The Motley Fool recommends Exelon.
Posted on: Tue, 22 Jul 2014 15:12:05 +0000
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