FirstEnergy Corp. (NYSE:FE) reported earnings Tuesday, giving income investors a good long look at why their dividends just got slashed 35%. With similar dividend haircuts from Atlantic Power Corporation (NYSE:AT) and Exelon Corporation (NASDAQ:EXC), can you count on FirstEnergy Corp. to ride the road to recovery? Here's what you need to know.
For Q4 2013, FirstEnergy Corp. sent some mixed messages. On the top line, FirstEnergy Corp. didn't live up to expectations. The utility reported fourth-quarter revenue of $3.64 billion, well below analyst estimates of $4.28 billion.
The utility did, however, manage to make more from less. On the bottom line, FirstEnergy Corp.'s adjusted earnings per shares (EPS) came in at $0.75, a full $0.06 above estimates.
Looking back across the full fiscal 2013, President and CEO Anthony Alexander noted that his company's adjusted EPS of $3.04 was at the upper end of guidance, which he considers "solid results."
Not so fast
While Alexander can pat himself on the back for hitting estimates for 2013, FirstEnergy Corp. has a long uphill battle ahead of it. The company has hit hard financial times in the past few years as it suffered from lower power prices and an outdated generation system. To remedy this, Alexander notes that he took "a series of decisive decisions [...] to strengthen our financial position and reposition the company."
For income investors, those smooth words are a stark reminder of many shareholders' worse nightmare. FirstEnergy Corp. has ventured where few utilities dare go, cutting its Q1 dividend by 35% to help balance its books.
Dividend cuts can mean good or bad news for investors. When Atlantic Power Corporation sliced its dividend by 66% last year, shareholders ran for the door. Atlantic Power Corp. stock lost 30% in one week. And since the drop, Atlantic Power Corporation shares have shaved off another 20% as investors remain unimpressed with the company's books, new initiatives, and the utility sector in general.
Exelon Corporation also took a dividend haircut at the same time, but investors gave CEO Chris Cane the thumbs-up for his decision. As a nuclear-centric utility facing tough competition from natural gas amid falling power prices, Exelon Corporation needed to keep that cash for itself. Investors initially rewarded Exelon Corporation stock for the book-balancing, but enthusiasm has worn off in recent months to put shares at similar levels to the start of 2013. For Exelon Corporation, shareholders remain worried about continued competition from relatively cheap natural gas, among other things.
FirstEnergy Corp. isn't just padding its pockets with those diminished distributions. In his report, Alexander went on to note that FirstEnergy will "focus on more predictable and stable growth initiatives in our regulated businesses."
The utility plans to invest $4.2 billion into its transmission business over the next four years, in an attempt to snag "toll booth" revenue that is some of the steadiest and most lucrative money in the energy sector. But with 56% of its electricity generation still coming from coal, the company's fortune is continually tied to this fuel's fate.
FirstEnergy Corp's estimated range for fiscal 2014 doesn't touch its 2013 earnings and is even further behind 2012. The company is setting its sights low at just $2.45 to $2.85 per share, but investors need to look beyond next year. At current valuations, FirstEnergy's risky situation and unproven model don't add up. There are better stocks out there offering exceptional dividends -- something FirstEnergy can't promise at the moment.