Exelon Corp. (EXC) yesterday announced its 4Q'12 and fiscal 2012 financial results. Its dividend cut of 41% remained a popular topic of discussion following the earnings release. I believe EXC's stock price will react positively going forward as the dividend cut overhang has been removed now. Also, EXC has an attractive forward P/E of 13.4x compared to its competitors, and provides a decent dividend yield of 3.95%. Therefore, I am bullish on EXC.
EXC announced a dividend cut of 41% in an effort to maintain its investment grade credit rating. Quarterly dividends have been reduced from $0.525 per share to $0.31 per share. EXC will have a long-term payout ratio of 65% to 70%, in line with the industry average. Also, management highlighted that the revised dividend has been "stress tested," indicating dividend sustainability. The new quarterly dividend will be effective from 2Q'13. EXC's stock price is down almost 15% since November of last year, when the company indicated a possible dividend cut. Now, as the company has announced its plans to cut its quarterly dividend, this is likely to eliminate the uncertainty regarding future dividends and will restore investors' confidence. Following the dividend cut announcement, EXC shares are trading higher, indicating investors were anticipating a higher dividend cut than was announced. Currently, EXC offers a dividend yield of 3.95%.
For 4Q'12, EXC reported quarterly revenue of $6.28 billion, up 44% YoY. Adjusted operating earnings per share for 4Q'12 came out to be $0.64, representing a decrease of 22% YoY. Decline in EPS for the quarter was mainly attributed to weaker results in Exelon's Generation segment.
Exelon's Generation segment was able to grow its revenues to $3.92 billion, up 55% YoY. However, earnings for the segment experienced a decline of approximately 21% to $283 million, mainly due to higher interest costs and lower operating margins. Commonwealth Edison's (ComEd) reporting segment top line was down more than 5% YoY to $1.3 billion, whereas earnings for the segment were up approximately 34%. Weather had a positive impact on the segment's performance as heating degree days increased by approximately 11% YoY. Also, improvement in earnings for the segment was driven by higher operating income and lower interest costs.
The PECO Energy segment is the third highest revenue contributor for EXC. PECO revenues increased to $790 million, up 1.5% YoY, and earnings increased to $81 million, representing an increase of 9.5% YoY. The BaltimoreGas and Electric (BGE) segment contributed approximately $703 million in total revenues, and $0.02 earnings per share of the company.
Guidance And Outlook
Last year, EXC completed its merger with Constellation Energy. EXC realized O&M synergies of $170 million in 2012, and the company is on track to enjoy $550 million in O&M synergies starting from 2014.
EXC also introduced 2013 guidance in its latest earnings release. EXC gave a full year earnings guidance range of $2.35-$2.65 per share, and a 1Q'13 earnings guidance range of $0.60-$0.70 per share. Analysts are expecting full year 2013 earnings to be $2.53 per share and 1Q'13 EPS to be $0.70. Furthermore, EXC expects cash flow from operations to be approximately $6 billion in 2013.
Following are the earnings per share estimate by analysts for EXC, from 2013 through 2016.
EXC's CEO, Christopher M. Crane, is expecting natural gas price to rise to $4-$6 mmBtu, leading to a rise in power prices. Currently, natural gas prices are $3.28 mmBtu. Moreover, EXC cancelled its nuclear power plant expansion spending of $2.3 billion. This is mainly due current lower natural gas prices and slow electricity demand growth.
To avoid market commodity risk, EXC has hedged its power generation for the upcoming years. The following table shows the percentage of power generation hedged by EXC.
% of Power Generation Hedged
94% - 97%
62% - 65%
27% - 30%
Source: Investors Presentation
I believe EXC provides investors a good investment opportunity. As the dividend overhang has been removed, this provides investors an opportunity to lock in capital gains. Using the utility sector's forward P/E of 15.1x and EXC's estimated 2014 EPS of $2.36, a price target of $36 has been calculated. This provide investors an upside potential of 15%.
Duke Energy (DUK)
Southern Co. (SO)
Consolidated Edison Inc. (ED)
Debt to Equity
Source: Yahoo Finance
Moreover, EXC has an attractive forward P/E of 13.4x and the lowest debt to equity of 90% among its peers, as shown in the table above.