Exelon Q3 Earnings: Is Its Dividend Doomed?

Exelon (NYSE: EXC  ) isn't excelling at much today. The utility reported its third-quarter earnings, and its profits don't look pretty. Let's dig deeper to see if this quarter's a coincidence, or if Exelon's headed for dividend disaster.

Number crunching
I'll give you the good news first: Exelon's sales grew to $5.97 billion this quarter, an admirable 12.8% higher than 2011's Q3. 

Now the bad news: Even though Exelon's sales were up, Wall Street expected $7.67 billion, more than 20% higher than the utility's number. 

But it gets worse: Although the company grew its top line, its bottom line's bottom dropped out from underneath it. GAAP net income fell a whopping 50.7%, from 2011's $601 million third quarter to the company's most recent $296 million pocket change. For shareholders, that's the difference between $0.90 EPS last year and $0.35 EPS today. Ouch. 

Non-GAAP adjusted income does provide a glimmer of hope, though. Exelon's adjusted net income pulled through at $0.77, five cents higher than Wall Street's estimates. 

Where did all the money go?
This is the third straight quarter that Exelon's net income has fallen, and long-term trends don't paint a pretty picture for this company.

Source: e*trade.com 

Sales and income dipped during the Great Recession, which is to be expected. But as revenue bounced back to pre-recession levels, net income has continued to slide downwards.

In its most recent earnings report, the company cites six reasons for its lackluster performance:

  1. Lower energy margins – high nuclear fuel costs and lower market prices
  2. Lower nuclear volume – 40 days of unplanned outages (compared to three in 2011's Q3)
  3. Regulation – ComEd lost a rates battle, dropping GAAP net income from $112 million in 2011 to $90 million
  4. Higher expenses – pricier labor, contracting, and materials
  5. Shares dilution – the March 2012 Constellation Energy merger added shares and diluted earnings
  6. Increased depreciation and amortization expense – capex excess 

The big picture
Exelon's quick to make excuses for its miserly quarter, but let's examine the greater context of Exelon's past, present, and future:

  • Nuclear – Exelon is the nuclear producer in the U.S., but reduced capacity and outages hurt this year's performance. The company also recently dropped its approval request for a new Texas facility, due to competitive natural gas prices and economic/market conditions. 
  • Solar – Two new projects totaling 20 MW is not exactly game-changing for Exelon, but its 20-year contracts with an Arizona school district and the State of Maryland show that the utility can spot a deal when it sees one.
  • Wind – Unlike nuclear and hydro, Exelon's wind energy capture improved compared to last year, from 91.6% to 94.4% this quarter. 
  • Coal – Exelon waved goodbye to five plants nationwide, dropping about 2,535 MW of capacity but adding $565 million to its coffers once all the dust settles. 

Gone with the dividend?
Exelon offers a salivating 5.9% dividend, but this earnings report will undoubtedly leave more investors questioning the long-term sustainability of this yield. Let's take a look at how it holds up to competitors:

 

Dividend Yield

Debt-to-Equity Ratio

Price-to-Book Ratio

Exelon

5.9%

0.9

1.4

National Grid (NYSE: NGG  )

5.5%

2.5

2.8

Duke Energy (NYSE: DUK  )

4.8%

0.9

2.0

Dominion Resources (NYSE: D  )

 4.0% 1.7  2.6

Northeast Utilities (NYSE: NU  )

3.5%

1.0

1.4

NextEra Energy (NYSE: NEE  )

3.5%

1.6

1.9

Source: e*trade.com

Exelon comes out on top in debt, tied with Duke Energy. But when you consider the company's top-dollar dividend and cheapest price-to-book ratio, you can understand why dividend investors aren't ditching Exelon just yet.

But it can't go on like this forever. Exelon recognizes its financial challenges and is cutting back on non-critical spending.

It expects significant capex reductions between 2013 and 2015, including holding off on $1 billion in uprates for two nuclear plants and $1.25 billion in funding for wind and solar projects. 

With these plans in place, the company is actually raising its 2012 earnings guidance, from $2.55-$2.85 to $2.75-$2.95. 

My guidance on Exelon's guidance
I'm not convinced. The company's track record has me worried and cutting back on upgrades and energy diversification is going to hurt Exelon's long-term potential, even if it puts a financial Band-Aid on dwindling quarterly earnings reports.

Exelon has a nice fat dividend and reasonable debt, but its fundamentals and recent strategic decisions leave me with the impression that management's eyes are set on short-term shareholder happiness, and not sustainable growth.

If you're interested in dividends that won't disappear, The Motley Fool has compiled a special free report outlining our nine top dependable dividend-paying stocks. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost! Just click here to discover the winners we've picked.

Justin Loiseau has no positions in the stocks mentioned above. You can follow him on Twitter, @TMFJLo, and on Motley Fool CAPS, @TMFJLo.

The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Dominion Resources, Exelon, and National Grid. 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.


Read/Post Comments (4) | Recommend This Article (3)

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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 November 01, 2012, at 6:40 PM, IlliniBanker wrote:

    TMF has been pumping Exelon since it was in the $50s. Now that you guys are changing your tune, it may finally be the right time to buy.

    It is certainly possible that Exelon will experience a dividend cut. However, the long-term fundamental catalysts- growth in Midwestern manufacturing, coal plants shutting down, and a recovery in natural gas prices, all point to earnings stabilization and growth. More importantly, it has been nearly a decade since a nuclear reactor- capable of generating electricity at an operating cost of $20/megawatthour, has been as inexpensive as $1450/kilowatt, which is where EXC is getting priced right about now with 32 gigawatts of nuclear capacity and an EV of about $46 Billion.

    Without even considering global warming regulations, and factoring out the dividend, EXC is underpriced relative to the overall market and certainly other utilities at 12x earnings.

    Make no mistake- EXC could go lower- and Consolidated Edison (ED) lost 25% overnight when they instituted a surprised dividend suspension in 1974. Dividend cuts from utes are rare but traumatic events. However, it is a lot harder to lose money buying at $33/share than it was to lose money buying the same company at $50/share four years ago.

    "The fool does at the end what the wise man does at the beginning". Sadly, TMF may have behaved foolishly (with a lowercase f- as in rather unFoolishly) on EXC. The time to sell was four years ago; the time to buy will either be over the next few months or the day after the dividend cut. If you are a long-term investor, NOW is the time to start thinking about buying, but ease in slowly and keep your best powder dry until AFTER some certainty around the dividend.

  • Report this Comment On November 01, 2012, at 9:51 PM, stockmover wrote:

    Hey Mark, (IlliniBanker)

    You made many very excellent points. It always amazes me when the analyst's .... not just TMF, but others ... so often scream "the sky ls falling" but when a given stock is at its 52 week or all time high they're shouting BUY, BUY, BUY.

    In my 45 years of investing , I've seen this reaction so many times !

    Your advice " If you are a long-term investor, NOW is the time to start thinking about buying, but ease in slowly and keep your best powder dry until AFTER some certainty around the dividend " IMHO is Spot On.

  • Report this Comment On November 01, 2012, at 10:56 PM, Toroman wrote:

    Nukes are no longer competitive with natural gas generated elec. power.

    Using nukes to generate electric power is about as smart as building land-line phones. Technology has made it totally uneconomic.

    Next step will be to begin winding down nukes and de-commissioning them - an expensive process.

    This ship is sinking.

  • Report this Comment On November 02, 2012, at 11:52 AM, IlliniBanker wrote:

    Nuclear reactors generate electricity for about two cents per kwh in operating costs. This is lower than the fuel costs alone of natural gas at $3 per ten therms in a combined cycle turbine.

    This is before you get to the gas turbine's maintenance expenses and, of course, the negative externalities generated by carbon emissions from natural gas's consumption and methane emissions from its production.

    New nuclear reactors will be uneconomic in terms of capital costs until carbon has a price. However, nuclear reactors and hydro remain the cheapest *operating* form of energy generation.

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