Pepco Holdings (NYSE:POM) is one of the largest energy delivery companies in the Mid-Atlantic region, serving about 1.9 million customers in Delaware, the District of Columbia, Maryland and New Jersey. Pepco provides electric service, gas service and some renewable energy resources.
Why does Pepco look like a good stock to own? I think the biggest reasoning is that Pepco offers a $1.08 per share dividend on a stock that is averaging $19 a share. This calculates out to over a 5.5% yield. This has been a solid payout, as Pepco has increased or held the dividend the same since 2001. Also, the P/E ratio is acceptable, currently at just under 17, and a forward P/E of around 15.
So why is Pepco a bad pick? First off, the current payout ratio for the dividend is just under 95% and it will improve, so to speak, to "just" 86% this year. Earnings are going nowhere to speak, with the following estimates for 2012 and 2013.
2012 EPS and Net Income$1.26 $286.65 million
2013 EPS and Net Income$1.32 $300.30 million
Pepco announced on March 5, that it is going to offer 15.4 million more shares of the stock, plus the underwriters would have the option to purchase up to 2.3 million more shares. 17.7 million shares may not be much for a company like GE, but for Pepco, with a current total amount of shares outstanding of 227.5 million, this will increase the pot by 7.8%. Possibly the worst thing is, this stock is being issued to repay debt, fund working capital needs and capital work. This issuance is not to grow the bottom line of Pepco.
Below is an adjusted EPS I have calculated for Pepco based on a new amount of shares outstanding, 245.2 million.
2012 Adjusted EPS $1.17
2013 Adjusted EPS $1.22
Based on these figures, Pepco will continue to be over a 90% payout for dividends. Issuing additional stock has been a scary and recurring theme for Pepco, as I show in the balance sheet below:
BALANCE SHEET: 10 YEAR SUMMARY
Over the past 10 years, Pepco has increased its outstanding shares from 170 million to 227.5 million, for a 33.8% increase (or as I would like to call it, a dilution) of its shares, and if we count 2012, this dilution goes to 44.2%. I believe in offering shares of stock to raise money to buy another company or business line, but when it's basically to keep your company running, it's a horrible business practice.
Pepco also had negative cash flows in 2009 and 2010, before finally showing a positive flow in 2011.
An investment into Pepco in 1987 would actually have yielded you a loss over the past 24 years. The only true positive I can say about Pepco from 1987 to 2001 was the quarterly dividend went from 32.5 cents a quarter to 41.5 cents a quarter, which was a great yield for holders during this time.
Conclusion: While Pepco pays a solid yield, I see zero growth appreciation for this company. Also I am concerned about the long-term stability of the dividend, especially with dilution of the stock and the need to "pay more heads," so to speak. Pepco could cut the dividend again in the future, which could send the value of this zero-growth stock into negative territory.