Exelon (EXC) Announces Dividend Cut

by FI Fighter on February 10, 2013

in Stock Investing Thoughts

exelon

It finally happened. Exelon Corporation (EXC) announced a dividend cut that will become effective in Q2 2013. The quarterly dividend has been slashed from $0.525 to $0.31, a decrease of 41%.

I was a former shareholder of EXC, but recently exited out of my position in mid January. Although I no longer have any stake in the company, it still pains me to see this news.

The market reaction was somewhat of a surprise to me. The stock price actually increased after the bad news was announced last week. I’m guessing investors took the news as “positive”, since analysts were expecting an even larger dividend cut. EXC shares are currently trading at $31.08, compared to $28.40, which was the low reached after the Q3 earnings report. After Q3 earnings, investors started heavily speculating that a dividend cut might be imminent in the future.

I previously told myself that if I decided to exit out of EXC, I would do so before an official dividend cut was announced by management. I was certain any more bad news would completely tank the stock. However, this time around, it seems the bad news was really already baked into the stock price! I haven’t been investing in stocks long enough to recall another instance of something like this happening… This is an interesting datapoint for me, moving forward.

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{ 12 comments… read them below or add one }

S. B.No Gravatar February 11, 2013 at 5:20 am

I remember evaluating EXC a number of months ago when I felt I should have at least some money in the utility sector. I read a lot of arguments, pro and con, but it the end, I did not feel comfortable with the company. It was just a gut feeling. I went with SO instead, which I see you also have. NEE is another great utility company, but it’s way too high right now for my taste.

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FI FighterNo Gravatar February 12, 2013 at 10:15 pm

S.B.,

Looks like you made the right call listening to your gut. EXC isn’t a dividend growth stock, so it doesn’t really belong in my portfolio… I decided to take a gamble anyway.

It didn’t pay off, so live and learn. In the long run, it’ll probably rebound and be fine. But I’m trying to build a dependable income stream here, so of course having a stock that cuts the dividend is the kiss of death to sell. Bottom line, the income stream needs to grow, and I can’t count on EXC to do that. Good call on SO. I have some and will look to add more in the future.

Happy hunting!

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ExecutionerNo Gravatar February 11, 2013 at 5:26 am

Markets like certainty. The announcement added some certainty to the dividend situation. There were likely some who thought the dividend would be cut further, so since the news was not as bad as it could have been, likely we saw some short sellers heading for the exits at that point. EXC seems to be showing that it is willing to make an unpopular short-term decision in order to make their company stronger for the long run. I think it’s likely a better investment now than it was last year when they were paying unsustainably high dividends.

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FI FighterNo Gravatar February 12, 2013 at 10:24 pm

Executioner,

You’re probably right on that point. Now that the dividend cut is official, all the chatter and speculation amongst investors can finally stop. I’m not sure what most analysts were anticipating, but a 41% haircut is way too high in my book. That’s cutting your income stream in half, almost…

Even with the bad news behind, there are just too many other attractive stocks out there for me to want to get back into EXC right now.

Happy hunting!

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Compounding IncomeNo Gravatar February 12, 2013 at 4:35 am

41% is brutal, ouch! I never seriously looked at EXC since the dividend was stationary for so long. If all I wanted was a 6% yield with no increase, I’d normally look for something higher in the capital structure such as preferreds or bonds.

SO should be a good utility. In the recent conference call they reaffirmed their commitment to dividend increases. We should expect 3-4% or so raises. AVA recently announced a 5% increase and UNS should announce one later this month.

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FI FighterNo Gravatar February 12, 2013 at 10:27 pm

CI,

Yeah, I hear you. I usually look for dividend growth and consistency when selecting a stock to invest in. EXC was the exception, not the rule. Look what happens when I deviate from the good, trusty road ;)

I like SO. AVA is probably one I’ll add in the future. I like your idea to diversify geographically with your utilities. Also, mixing gas and electric companies. And with natural disasters, you just never really know. Probably a good idea to not stay too concentrated in just one region.

Cheers!

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Brick By Brick Investing | MarvinNo Gravatar February 12, 2013 at 12:31 pm

I was stopped out of this stock as well. It seems as if this stock’s run has ended. What I would have done to own it 5 years ago and enjoy the ride. This is why I stick to my trailing stops no matter what because sometimes emotions get the best of us.

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FI FighterNo Gravatar February 12, 2013 at 10:33 pm

Marvin,

Good idea to use trailing stops. For all stocks, even “boring” utilities. EXC’s performance over the past few years resembles that more of tech stocks (e.g. MSFT, CSCO, INTC, etc.) than what you might expect from a utility. Just a little too much excitement for me. With utilities, I’ll take the slow growth… just pay me a growing dividend :)

Cheers!

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Dividend MantraNo Gravatar February 13, 2013 at 6:02 pm

FI Fighter,

I looked at EXC a little while back when it was all the rage over on Seeking Alpha. I honestly couldn’t figure it out, so I stayed away. I guess I’m glad I did. We don’t always miss mines like this, but it feels good when we do.

There’s only a few utilities I like, as they typically have low dividend growth. I’m long on AVA and UNS, but SO is also good. SO is one I’d like to own at some point. D is one I follow as well. I think keeping utilities to 5% or so of a portfolio isn’t a bad way to juice the current yield a bit.

Best wishes!

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FI FighterNo Gravatar February 17, 2013 at 11:27 pm

DM,

You made the right call on skipping EXC. Yeah, I read some of those articles on Seeking Alpha as well, and unfortunately I was unable to avoid this mine, this time around.

When I first started, my portfolio really wasn’t strictly focused on dividend growth, since I also held some RIG and AAPL (still do). Over time, I’ve learned that dividend growth is the way I want to go. Therefore, EXC really doesn’t fit that model, especially with the recent dividend cut.

Live and learn! I’m interested in adding some AVA to complement my SO holding. I haven’t researched UNS yet, but thanks for the tip! D and DUK are others I may consider in the future.

Happy hunting!

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IntegratorNo Gravatar February 13, 2013 at 7:08 pm

I looked at the historical financials for this stock, and frankly they didn’t look so bad. I can only surmise that 2012 was a terrible year for the company. The payout ratio for the company was only 56% in 2011. While revenue hadn’t really grown for 5 years, I would have been cautious but not seen the full extent of the cut coming.

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FI FighterNo Gravatar February 17, 2013 at 11:31 pm

Integrator,

Yeah, I think 2012 proved to be a very bad year for EXC, worse than anticipated. The dividend had lagged for many years, but I don’t think many saw the writing on the wall. Management had been reassuring investors that the dividend was “sturdy” during conference calls… It really wasn’t until after Q3 earnings when people started to realize that a dividend cut wasn’t just possible, but probably imminent in the future.

Cheers!

Reply

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