Should Exelon Investors Put an Asterisk on Its Dividend?

Exelon has recently issued a public offering. How does this practice impact the company’s annual dividend yield?

Jul 24, 2014 at 3:30PM

A few weeks ago Exelon (NYSE:EXC) issued a public offering of 50 million shares for $35 per share. This decision will enable the company to invest in its operations and even reduce its debt burden. Has this public offering indirectly reduced the company's divided yield? And should investors expect another public offering?  

Dividend yield and buyback yield
The main reason people tend to invest in utility companies such as Exelon or FirstEnergy (NYSE:FE) is for the high dividend payment they offer. But as suggested in a recent article, many take into account the buyback yield in the calculation of the annual yield Exelon offers. 

As stated in a past Fool article, the buyback yield is based on a company's shares repurchase program divided by its market cap. This buyback yield should be added to the dividend yield and form an "augmented dividend." The basic idea is that when a company buys back shares, the remaining shares increase in value. Therefore, the buyback yield should be considered as another part of the annual yield investors receive. 

But Exelon has done the opposite and offered shares, which in effect diluted its investors. This gives the "buyback yield" a negative value.  

Currently, this problem isn't much of a big issue because the company's "negative buyback yield" is only -0.13%. This means, since the current dividend yield is 3.91%, the augmented dividend is actually 3.78%. So, this issue only has a modest negative impact on Exelon's dividend yield, but this number could pick up if it were to make another public offering in the future. Thus, Exelon investors should keep a lookout for any significant changes in its public offerings. But is the company's situation that dire? 

One of the reasons for this offering is the expected decline in the company's earnings this year, which are expected to average $2.4 per share -- nearly 4% below the earnings per share recorded a year back. 

Moreover, its debt also grew in the past year by over $500 million. Despite the company's rising debt, it still has the lowest debt burden when compared to Duke Energy (NYSE:DUK) and FirstEnergy

Exc Debt To Equity Ratio

Source of data: Google Finance

FirstEnergy's and Duke Energy's higher debt burdens haven't prevented them from offering annual dividend yields of 4.5% and 4.3%, respectively. These yields are much higher than the Exelon's. This could also partly explain why Exelon's payout ratio was the lowest among its peers. 

Exc Payout Ratio

Source of data: Google Finance 

Exelon's relatively low payout ratio suggests it doesn't have to borrow money to pay its dividends. 

Exelon has room for improvement, but its situation isn't as dire as its peers'. On the one hand, the company's annual dividend yield is lower than Duke Energy's or FirstEnergy's, and the negative buyback yield only brings the annual yield even further down. On the other hand, considering the low payout ratio and small debt burden, Exelon's financial risk isn't as high as other utility companies. Finally, investors should still consider that any additional share offerings could reduce Exelon's yield down the line. 

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Lior Cohen has no position in any stocks mentioned. The Motley Fool recommends Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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