FirstEnergy Earnings: Can This 5.5% Dividend Deliver?

FirstEnergy (NYSE: FE  ) reported earnings on Monday, and Mr. Market was unimpressed. The utility missed top-line sales expectations but managed to coast by on earnings. With a sizable 5.5% dividend yield and one of the largest customer bases around, there's a bull story behind every bear. Let's take a deeper look at the company, see what it's offering, and decide whether first energy deserves a spot in your portfolio.

Number crunching
Bad news first for FirstEnergy: revenue. The utility reported $3.5 billion in sales for Q4 2012, a miserly 28% below analyst estimates  and 7.6% lower than 2011's fourth quarter. Falling sales have proven to be a common trend for utilities this quarter, but FirstEnergy's flop puts it at the top of the bottom.

On a more positive note, the company squeaked by with $0.80 earnings per share, matching Wall Street expectations. Earnings also came in $0.03 higher than last year's Q4, but 2012's overall results took a $0.91 per-share hit from pension costs and other charges.

For FY 2012, FirstEnergy's sales clocked in at $15.3 billion and earnings logged $1.84 diluted EPS. Compared with 2011, sales fell 5.2%, while EPS dropped by just over 20%.

Can FirstEnergy finish?
Like many utilities, FirstEnergy operates both regulated utilities and unregulated energy generation divisions. Regulated business offers slow and steady growth (if the company keeps on top of regulatory requests and approvals), while generation can be a company's ticket to big returns or cash-sucking expenditures.

FirstEnergy's 10 utilities account for 64% of the company's sales, while 18,000 MW of generation pulled in the remaining 36%. The decent split offers some risk diversification, but FirstEnergy's fuel sources provide some cause for concern. The company currently relies on coal for about 60% of its total generation capacity and expects to spend $985 million on EPA compliance measures over the next several years.

Source: First Energy 2013 Credit Suisse Energy Summit Presentation. 

FirstEnergy's also adding on to its 20,000-plus miles of transmission line. The company plans to spend around $700 million in the next three years, which should provide an additional source of steady revenue.

Capital expenditures cut cash from the balance sheet, but spending now could mean savings down the road. Here's how FirstEnergy stacked up against competitors for 2011:

Company

Capex ($M)

Capex-to-Sales Ratio (%)

FirstEnergy

2,281

22%

Atlantic Power (NYSE: AT  )

115

40%

Duke Energy (NYSE: DUK  )

4,363

30%

Southern (NYSE: SO  )

4,525

26%

Exelon (NYSE: EXC  )

1,329

7%

Source: Yahoo! Finance.

Although Exelon (NYSE: EXC  ) brings up the rear, it's taking its capex seriously. The company recently announced that it will slash its dividend by 40% in 2013 to fund new nuclear and renewable initiatives. Southern's (NYSE: SO  ) spending is helping to shift the utility away from coal, with $16.5 billion slotted for capex in the next two years alone. Duke Energy (NYSE: DUK  ) is undergoing a massive modernization project and will ultimately spend around $12 billion to retire 6,800 MW of costly coal plants and add on cheaper/cleaner energies. With the smallest sales around by a long shot, Atlantic Power's (NYSE: AT  ) supersized capex-to-sales ratio makes sense for a company with growth on its mind.

Dividend dynamite?
FirstEnergy's 5.5% annual dividend yield is nothing to yawn at, and income investors could look to this utility as a long-term cash cow. But all dividends are not created equal, and the staying power of any dividend is even more important than its current payout.

FE Cash Div. Payout Ratio TTM Chart

FE Cash Div. Payout Ratio TTM data by YCharts

FirstEnergy has crept its way to the bottom of the pool over the past few years, creating a less-than-rosy outlook for this company's future distributions.

Foolish bottom line
In an inarguable sign of disapproval, Mr. Market has pushed FirstEnergy's stock down around 5% since its earnings announcement. Its latest quarter didn't win it any favors, and the company's long-term value add remains to be seen. The utility is spending decent money to keep itself competitive, but it has quite a bit of catching up to do compared with Exelon's nuclear fleet and Duke's major progress. With an unstable dividend to boot, I'm putting FirstEnergy on the backburner for now.

For a company with much of its modernization spending behind it, Exelon is perfectly positioned to capitalize on having the largest nuclear fleet in North America. Combine this strength with an increased focus on renewable energy, and Exelon's recent merger with Constellation places Exelon and its best-in-class dividend on a short list of top utilities. To determine whether Exelon is a good long-term fit for your portfolio, you're invited to check out The Motley Fool's premium research report on the company. Simply click here now for instant access.


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  • Report this Comment On February 28, 2013, at 10:43 AM, drseusphd wrote:

    And you think Verizon and ATT have safe dividends? better revist their fundamentals too

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