Why Exelon and FirstEnergy Are Sliding

What's driving down shares of utilities such as Exelon and FirstEnergy?

Jul 19, 2014 at 1:50PM

Shares of FirstEnergy (NYSE:FE) and Exelon (NYSE:EXC) have declined in the past month by more than 6% and 9%, respectively. If you're chalking it up to the U.S.'s plan to reduce carbon emissions by using less coal, which could lead to higher operating costs for utilities, then this reasoning doesn't hold up for Exelon. This company mostly uses nuclear power to generate electricity. So, let's consider the following factors that could be behind these companies' recent falls. 

Bullish market
As stated by a Foolish colleague, the recovery of the financial markets, including the S&P 500, is driving investors toward higher-risk assets and away from less risky assets such as utilities. If the bullish trend continues, investors are likely to look for growth companies and less for stocks offering high dividend yields and little to no growth in value. This also brings up another point: Will utilities' dividend yields remain high? 

Rise in debt and borrowing costs
The main draw of utilities is the high dividend yields they pay to their investors. But these companies aren't making enough to sustain the high dividend paychecks. In the first quarter, FirstEnergy's earnings per share reached $0.29, while its dividend per share was $0.36. Exelon's EPS reached only $0.1, while its dividend was $0.31 per share. 

Even these companies' operating cash flows don't cover the dividend payments. As a result, Exelon and FirstEnergy's debt levels increased in the past year by $0.5 billion and $1 billion, respectively. 

If their earnings don't pick up in the coming quarters, they are likely to slash their dividend payments again. Late last year, FirstEnergy reduced its dividend by 35%. Exelon also slashed its dividend payment by nearly 41% in early 2013. In such a case, these stocks will lose their appeal even further. 

The current market expectations are that the Federal Reserve may raise its interest rates by mid-2105. Such a change in policy is likely to lead to a slow rise in borrowing cost for companies, which will make borrowing cash less desirable for Exelon and FirstEnergy. 

Lower profit margins
Both companies use natural gas as one of their energy sources to generate electricity. For Exelon, natural gas accounts for 22% of its input; for FirstEnergy, natural gas is roughly 8% of its total fuel mix. During the first half of this year, the price of natural gas spiked to hover over the $4.5 mark. Further, during the second quarter of 2014, coal prices also rose by almost 5%, year over year. Coal accounts for 57% of FirstEnergy's fuel mix.  

The rise in energy prices could partly explain the drop in profitability of these companies, as indicated in the chart below.  

First Energy Profit Margin July

Source: Google Finance.

If natural gas and coal prices remain high, they could further cut the profit margins of these companies and make them less attractive as investments. 

The bottom line
FirstEnergy and Exelon haven't done well in the past several weeks, and as long as they don't show any significant improvement in their profit margins, and the bullish run in the equities market continues, these companies' stocks will keep losing their appeal, and investors will likely steer away. 

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers