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. 

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. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information