We have been pleased that our reports on Exelon Corporation (EXC) have generated much interest from the investment community and we have been able to continually find new ways to analyze and evaluate our thesis on the company. We noticed that because of the weakness in the unregulated power generation market and the solid performance of regulated utilities, Morningstar Investment Research assigns 4 and 5 star ratings to the power generation utilities like Exelon and 2 and 3 star ratings to regulated utilities like Wisconsin Energy (WEC) because it believes that power generators will roar back to life soon. We noticed that the only utility that Morningstar has assigned a 5 star rating and a wide moat rating was Exelon. Travis Miller has been covering Exelon since 2007 for Morningstar. Unfortunately for Exelon’s stakeholders, Morningstar’s fair value estimates on Exelon’s shares have been eroding since 2008. Exelon’s share price has been declining steadily since 2008, and that enabled it to keep its Morningstar Rating between 4 and 5 stars during that time.
Dividend Yield, Payout Ratio and Growth:
Dividend Yield: Exelon stakeholders have been touting the company as a great value based on its 5.9% dividend yield. We concede that is the highest dividend yield in the industry and it is 270bp higher than the 3.2% dividend yield on Wisconsin Energy. Because of the flight to safety and income in June and July, we noticed that prices were pushed up on all utilities, especially high quality regulated utilities like WEC. As volatility has subsided in August, utilities have seen the share price gains dissipate. We don’t care that WEC declined by 7.5% during August because if we had sold it in July, we would have had to pay 20% of our proceeds in taxes. EXC’s decline in August was 5.5%. WEC is still up ~10.5% for the year because it doesn’t grace its earnings reports with an alliterative alphabet soup of adjustments to its earnings like Exelon. Exelon’s Alibi Ike routine hasn’t stopped its stock from registering a 15% decline YTD though.
Payout Ratio: Wisconsin Energy’s projected payout ratio for 2012 is 52%, which is well below Exelon’s adjusted projected payout rate of 76%. Since Exelon has been able to maintain its $2.10/share dividend since 2008 in the face of steadily decline EPS, its payout ratio has grown from 52% in 2008 to 76% adjusted-projected in 2012. Wisconsin Energy has seen its dividend payout ratio increase from 36% in 2008 to 52% projected for 2012. However, this has come because WEC has increased its dividend from $.54 in 2008 to $1.20 in 2012. WEC is also expected to increase its EPS from $1.50 in 2008 to $2.30 in 2012. Because its Power the Future capital program was completed as of last year, WEC can harvest value for shareholders by increasing the dividend payout ratio while simultaneously increasing its retained earnings per share.
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