Protecting FirstEnergy Investment With Dividends

Feb. 1.12 | About: FirstEnergy Corp (FE)

FirstEnergy (NYSE:FE) operates as the U.S.'s largest investor-owned diversified energy company. The company primarily serves customers in the Midwest and Mid-Atlantic regions. The company's footprint stretches from the Ohio-Indiana border to the New Jersey shore.

In its most recent Q3 2011 earnings conference call, President and CEO Anthony Alexander indicated the integration of Allegheny is going very smoothly, and the company is already reaping some synergies from the FirstEnergy/Allegheny merger. A comprehensive settlement was confirmed allowing potentially 50% of Ohio's retail electric customers with access to competitive markets, subject to regulatory approval which could prove beneficial to the company.

Anthony Alexander indicated the company is positioned for new environmental regulations, such as the Cross-State Air Pollution Rule that addresses SO2 and NOx. In the conference call, Alexander indicated the company is expecting to invest $2 billion to $3 billion to comply with environmental regulations associated with reducing mercury and particulate emissions. However, on January 26, 2012, the company announced the are retiring six coal-fired plants due to increased regulation based upon U.S. Environmental Protection Mercury and Air Toxic Standards [MATS]. The closing of the six coal-fired plants is subject to review for reliability by PJM Interconnection, the regional transmission organization. So, maybe the company is not going to invest $2-$3 billion related to mercury and particulate emission reduction.

Eastern utilities were severely impacted by Hurricane Irene and an early snowstorm. In some areas, the company will have to totally rebuild the system. The company indicated further growth opportunities are available in Illinois, Northern Maryland, Central Maryland and in areas served by Penelec, West Penn Power and Duquesne.

The company has been having some issues with the Davis-Besse Nuclear Power Station with regard to cracks, and on January 6, 2012, the company announced the structural integrity of the plant has been confirmed. Competitors of FirstEnergy include American Electric Power (NYSE:AEP), Dominion Resources (NYSE:D) and Public Service Enterprise Group (NYSE:PEG). FirstEnergy pays a very nice dividend with a current annual dividend yield of 5.2%. The next dividend payment of $0.55 is scheduled for March 1, 2012 for investors of record on February 7, 2012 with an ex-dividend date of Friday, February 3, 2012.

FirstEnergy's stock price has been very erratic over the last year and has been stuck in a trading range between $38 and $46 over the last six months as shown below:

The company's stock price is currently near is previous support level of $42 and with the good news associated with the Davis-Besse Nuclear Power Station, the stock is positioned for another leg-up. However, with the significant amount of regulation the company is exposed to, and the negative view of nuclear power following the events in Japan, the leg-up could be delayed.

An investor might consider entering a married put position for the company which provides protection for the downside, yet enables participation in the appreciation of the stock. A married put is entered by purchasing a protective put for an existing or purchased stock. Using PowerOptions tools, a married put position was found for FirstEnergy with a maximum potential risk of 2.8% and unlimited upside. The maximum potential risk assumes the receipt of $1.10 of dividend payments during the time frame for holding the married put. The specific put option to purchase is the 2012 Jul 43 at $3.30. A profit/loss graph for one contract of the position is shown below:

Once the price of the stock is above the $43 strike price of the put option, a covered call income method can be entered as described by RadioActiveTrading to reduce risk and generate income.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.