Best Buy: Dynegy, Duke, or Exelon?

In this Motley Fool series, we rank three related stocks on five criteria to determine the best buy.

Today's matchup is a utilities battle between Dynegy (NYSE: DYN), Duke Energy (NYSE: DUK), and Exelon (NYSE: EXC).

Each company operates primarily in the U.S., unlike AES (NYSE: AES), which gets the bulk of its sales in Latin America, along with a chunk in Asia and Europe. So by using five short-of-scientific-but-carefully chosen criteria, let's determine which of these domestic utility plays is the best buy.

Round 1: Balance sheet
Since utilities usually have relatively steady operations, they tend to have leveraged balance sheets. Still, I ranked these three by their debt-to-capital ratios. Duke and Exelon have 40%-50% debt while Dynegy is just over 60%. More troubling, though, is Dynegy's dangerously low interest coverage ratios. Rank: 1) Duke, 2) Exelon, 3) Dynegy.  

Round 2: Operations
For operations, let's look at net income margin. Exelon's comes in just under 15%, Duke just under 10%, and Dynegy again brings up the rear with negative earnings. Rank: 1) Exelon, 2) Duke, 3) Dynegy.

Round 3: Price
Looking at price-to-tangible book value ratios, Dynegy's balance sheet and operations woes have been noticed by the market. It sports a ratio of just 0.2. Compare that to Exelon's rich ratio of 2.6. Rank: 1) Dynegy, 2) Duke, 3) Exelon.

Round 4: Dividend
Like master limited partnerships (MLPs) Kinder Morgan Energy Partners (NYSE: KMP) (6.3% yield) and Enterprise Products Partners (NYSE: EPD) (6%) and the quasi-MLP Linn Energy (Nasdaq: LINE) (8.3%), a big selling point for utilities is their generally high dividend yields. The implicit promise for the pipelines (Kinder and Enterprise), the utilities, and even the exploration and production play (Linn Energy) is that the businesses (and hence the cash flow) will be steady enough to maintain these higher-than-average payouts. 

Duke brings it with a 5.7% dividend yield. So does Exelon at 5.1%. Given its situation, Dynegy wisely abstains from a dividend -- it stopped them in 2002. Rank: 1) Duke, 2) Exelon, 3) Dynegy.

Round 5: CAPS rating
Our CAPS community loves all three of these stocks. Exelon is rated five stars (out of five) while Duke Energy and Dynegy both garner four stars. If you are interested in AES' more international operations, it, too, ranks four stars. Rank: 1) Exelon, 2) Duke and Dynegy.

The summary rankings

There you have it. Duke Energy squeaks past Exelon as our best buy. Dynegy finishes last but appears to offer some upside possibilities. What do you think? Declare your winner in the poll below and then share your thoughts in the comments section below the poll.