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

Category

Dynegy

Duke Energy

Exelon

Balance sheet

3

1

2

Operations

3

2

1

Price

1

2

3

Dividend

3

1

2

CAPS rating

2

2

1

Average finish

2.4

1.6

1.8

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.

Anand Chokkavelu does not own shares of any company mentioned. Exelon is a Motley Fool Inside Value recommendation. Duke Energy and Enterprise Products Partners LP are Motley Fool Income Investor picks. Motley Fool Options has recommended writing puts on Exelon. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 30, 2010, at 5:07 PM, harispicks wrote:

    So why did Exelon get more votes from fools?

  • Report this Comment On August 01, 2010, at 8:04 PM, philkek wrote:

    Thanks MF, for this article on high dividend companies. MF taught me to do more analysis on all companies before investing my hard earned money. I check for positive fundamentals like little debt, free money flow, high ROE, etc. My homework today suggests to me that EXC is the better play. That is my opinion on these companies. ALL three have potential for good gains. I've had good gains with LINE. Must watch your business close, though. If you snooze, you lose. Better Business Bureau warns us to investigate BEFORE we invest. Meantime, fool on for profits.

  • Report this Comment On August 11, 2010, at 2:20 AM, susan400 wrote:

    dyn is going under.

    300 to 3

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