This Utility Stock Should Be Avoided With A Potential Dividend Cut Looming

| About: Exelon Corporation (EXC)

Exelon Corp. (NYSE:EXC) is one of the largest utilities in the United States. It has approximately 35,000 megawatts of power generation capacity. It provides power to many millions of businesses and consumers in states such as Maryland, Illinois, Pennsylvania, and others. It is a leader in power generation from natural gas, nuclear, and other sources of energy.

While dividend stocks have been performing well over the past year, Exelon shares have not. Even though utilities are the type of stock investments that "widows and orphans" seem to want due to stability, Exelon shares have been dropping and now trade near 52-week lows. The stock currently yields close to 6%, but that might not be unsustainable as the CEO recently said the company could cut the dividend. Electricity prices have been falling and this company has a credit rating that is just above investment grade. Because of that, Exelon might need to cut the dividend to avoid a ratings downgrade and the higher interest rates that would come with a below investment grade rating.

A recent Bloomberg article summarizes one analysts' concerns for a potential dividend cut:

'With so much of their business dependent on commodity prices and given where those prices are, one should realize that potential for a dividend cut exists,' Paul Patterson, a New York-based utility analyst for Glenrock Associates LLC, said today in a telephone interview.

Analysts expect earnings to drop in 2013, and this along with the need to maintain current credit rating levels support the potential need for a dividend cut. With the word coming out about a potential cut, this stock is not likely to do well until the uncertainty is lifted. After clarity arises on this matter, the stock might be worth considering once again. But investors should resist buying now even as the stock makes new lows.

Key Data Points for Exelon:

  • Current Share Price: $33.58
  • 52-Week Range: $33.24 to $45.45
  • Dividend: $2.10 per share, which yields about 5.9%
  • 2012 Earnings Estimate: $2.75 per share
  • 2013 Earnings Estimate: $2.61 per share
  • P/E Ratio: about eight times earnings

Data is sourced from Yahoo Finance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: No guarantees or representations are made. Please consult a financial advisor before making investments.

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