Last week, I wrote an article discussing why I believe Exelon (EXC) is a contrarian utility investment. I attempted to list the reasons why EXC shares have been underperforming other domestic utilities, including declining natural gas prices, EXC's nuclear power exposure and the company's recent major acquisition of Constellation Energy Group. Almost immediately after the article was published, I was alerted of yet another reason that may very well be substantially contributing to EXC's recent underperformance.
Shortly after its publication, I was told by a comment that my stating EXC has a yield of around 5.6 percent was inaccurate, and that the proper yield was 4.1 percent. Upon receiving this comment, I was quick to check and confirm which numbers were accurate. I discovered that the yield I stated was correct, but I had to wonder where, why and how an individual would have come to believe such a misconception. Moreover, if this error is commonplace, it may be contributing to some of EXC's recent share performance woes, and perhaps substantially.
To make things clear, EXC's annualized dividend is currently about 5.45 percent, and the company is on schedule to pay out $2.10 per year, just as it did in 2009 and 2010. So far this year, EXC has paid three dividends: (1) $0.525 (ex-div 02/13/2012); (2) $0.1458 (ex-div 03/13/2012) and (3) $0.3792 (ex-div 05/11/2012). Exelon split its 2Q dividend into two parts, but the $0.1458 and $0.3792 payouts combine to equal $0.525, which is the same amount EXC paid in each of the prior 14 quarters.
That means that EXC paid out $1.05 though the first half of 2012, and is on schedule to pay out $2.10 for the full year. Based upon EXC's last closing price, $38.52, an annualized payout of $2.10 is equal to a yield of 5.45 percent. This is slightly below the 5.6 percent I stated last week, because EXC shares appreciated by slightly over three percent in the interim.
Apparently, it is this split dividend that is causing some confusion out there. If one were to base the total annualized dividend by assuming that the last payout was EXC's total for the quarter, $0.3792 times four would equal $1.5168 and that would work out to a 3.93 percent annualized yield. But assuming such would be inappropriate. Exelon had already explained that the reason it split its dividend was to synchronize payouts between Exelon and Constellation, which it just acquired. In particular, according to EXC's website's Merger-related Dividend Information:
Shareholders of both Constellation and Exelon will receive pro-rated dividends in order to synchronize the two companies' dividends so that Constellation shareholders will receive dividends at Constellation's rate through the day before closing and all Exelon shareholders (including former Constellation shareholders) will receive dividends at Exelon's rate from the closing date and after. As previously declared by Constellation's board of directors, a pro-rated dividend equal to $0.23760 per share of Constellation's common stock will be paid on April 11, 2012, to Constellation shareholders of record at the close of business on March 9, 2012.
The Exelon board of directors previously declared a pro-rated dividend equal to $0.14575 per share of Exelon's common stock, which will be paid on April 11, 2012, to Exelon shareholders of record at the close of business on March 9, 2012. The Exelon dividend declaration also included a second pro-rated dividend equal to $0.37925 per share of Exelon's common stock, which will be paid to all Exelon shareholders of record, including the former Constellation shareholders, at 5:00 p.m. New York time on May 15, 2012. This portion of the dividend will be paid on June 8, 2012. Together, the two pro-rated Exelon dividends total $0.525 per share, ensuring that Exelon shareholders will receive their regular quarterly dividend, although it will be paid in two portions.
So, the question remains, why are investors erroneously calculating EXC's dividend as being about 27.7 percent below the actual yield. This difference is substantial, as it works out to about an additional 1.51 percent per share in dividends, or about the same yield a 10-year U.S. Treasury now pays.
And so I did a little investigating into some of the more commonly visited financial websites to discover where this misinformation may be originating. The results are below, and they are somewhat surprising.
First, I went to Morningstar, which primarily provides independent investment research to investors. According to Morningstar's website, EXC shares have a projected yield of 3.94 percent. See the screen capture from Morningstar's page on EXC, listing a projected yield of 3.94 percent in the upper right corner:
Based upon the 3.94 percent yield that MORN indicates for EXC, this projected yield was calculated by multiplying the last dividend by four and dividing the result by EXC's current price. This calculation, unfortunately, discounts EXC's quarterly payout by 0.1458, or $0.5832 for the full year.
Similarly, Yahoo! Finance, lists EXC's yield as four percent, and its annualized dividend payment as $1.52. These numbers appear to indicate that the site rounded up the erroneously presumed $1.5168 annualized payout. See a screen capture from Yahoo! Finance's page on EXC, listing a yield of four percent at the bottom of the image:
This is especially concerning because Yahoo! Finance is one of the most used Internet destinations for financial information, including the one I most commonly use.
Another web page that included this error is Bloomberg, which lists EXC's yield as 3.9372 percent. While Bloomberg's statistics do not round up or down after the second decimal, they nonetheless based the calculation on the same partial dividend of $1.5168. The result is a more accurate inaccuracy, but still misinformation. See a screen capture from Bloomberg's page on EXC, listing a yield of 3.9372 percent at the bottom of the image:
Not all websites made this mistake. Google lists an annualized yield of 5.45 percent, even though it also lists the dividend as $0.38. This indicates that Google's page probably calculated the yield by adding the last year's worth of paid dividends, or that Google Finance recognized that two dividends were paid in the last quarter, which it added before simply multiplying by four. See a screen capture from Google Finance's page on EXC, listing a yield of 5.45 percent near the top right:
Along with Google Finance, CNBC's web page also lists EXC's dividend as 5.45 percent, and also lists the correct annualized dividend payout as $2.10. See a screen capture from Google Finance's page on EXC, listing a yield of 5.45 percent at the bottom right corner:
Additionally, Seeking Alpha has a 5.4517 percent yield listed. See a screen capture from Seeking Alpha's page on EXC, listing a yield of 5.4517 percent near the bottom right:
There are many sites that offer free information. Sadly, you sometimes get no more than your money's worth out of that free information. In this case, when sites such as Bloomberg, Morningstar and Yahoo! Finance list Exelon's yield as being about 27.7 percent below EXC's actual yield, would-be and existing investors may be unfairly persuaded to avoid EXC shares, or even sell them. Beyond this difference being so substantial that it is equal to the annualized yield of a new 10-year U.S. Treasury, the error also discounts EXC's yield from its place as the highest yielding large cap domestic utility.
This mistake makes it appear that Exelon's yield is below many of its peers, though they are all actually lower yielding utilities. For example, American Electric Power Company (AEP) yields 4.51 percent and Duke Energy (DUK) yields 4.58 percent, both of which are currently above average yields for a utility, but still yielding far below EXC's actual yield. Nonetheless, this error to EXC's yield gives the appearance that these competitors, among many others, yield considerably more than EXC.
In due time, Exelon will pay out its 3Q 2012 dividend and the above-mentioned errors may then disappear. Last year, Exelon reported its 3Q dividend on July 26, 2011, with a record date of August 15. At that point, information on Exelon's yield should be accordingly updated and corrected, and some of this misinformation on Exelon may finally cease.