Exelon Should Be Considered For Income And Long-Term Growth
The company will benefit as the regulations are tightened to reduce the carbon emissions. Exelon’s robust capital spending plans will position the company well for future growth over the next 5-7 years. Merger with Pepco will result in immediate growth in earnings as well as cash flows. Exelon’s (NYSE: EXC ) competitive position has become less attractive following a crash in the natural gas and coal prices. This has resulted in lower earnings and dividends. However, Exelon may benefit in future when EPA (Environmental Protection Agency) will impose additional costs on thermal power plants. As Exelon is using nuclear power and abiding by the clean air rules, it will not have to face such higher fines and closure of its operations. The continued decline in solar energy prices will make it competitive with other natural resources (coal, oil and gas), in large parts of the world. As anticipated, solar prices will keep on falling in the future, this is a cause of concern for the utility companies solely focusing on fossil fuels for power generation. It is predicted that by the end of 2019, solar energy will be competitive and it will be able to compete with the other sources of electricity. Some of the smarter utilities such as NRG Energy (NYSE: NRG ), have already started to shift towards solar energy, and have also set up solar installation services in competition with SolarCity (NASDAQ: SCTY ) and Vivint Solar (NYSE: VSLR ). However, Exelon is relatively better placed than the others to survive this change. The company relies on nuclear energy, which is cleaner than coal or natural gas. Also, nuclear power is not very expensive, and can provide backup to disturbed wind and solar energy power. Conversely, Exelon faces operational and financial risks from its nuclear energy generation assets, such as strict environmental regulations by the government that will remain a threat to the company’s future financial performance. All these factors are out of control of the company and it cannot do much to control them. Also, any changes in demand or fuel prices may have an impact on the stock performance of the company. Moving forward, high bond yields are also a risk to Exelon stock price. As the 10 year bond yields have climbed up sharply, there is a huge pressure on EXC as government bonds become more attractive. This is a factor that should be considered by investors before making investment in the company. However, despite the fear of a rise in interest rates, EXC still remains attractive due to its dividend yield and company’s strong financial position. On the growth front, Exelon has plans to invest capital into regulated assets such as transmission and distribution of energy. However, it is shutting down 6 out of 11 nuclear plants due to their underperformance. It has also been invited to operate in the UK, which will boost its growth in the near future. To achieve the target of expansion, the company has allocated more than $5 billion for the current year. Exelon plans to achieve growth through acquisitions and investments in the utility industry. The recent acquisition of Pepco Holdings is an example of the strategy followed by the company. The merger will provide operational and financial synergies to the combined business. As a result, it will improve the post-acquisition earnings of Pepco-EXC, and also its cash flows for the years ahead. The combined business is expected to have a valuation of around $26 billion. Moreover, the earnings growth rate for the next 5 years is expected to be at 4.40%, which will have a good impact on the stock valuation of Exelon. The company is constantly improving its operational efficiency by improving the electricity generation capacity. The company will add more power generation plants to its portfolio by the end of 2018. However, the two new plants are expected to add 195 MW to its capacity. Furthermore, Exelon’s strong strategic growth initiatives and the management’s commitment to making healthy dividend payments make it an attractive pick for the long-term income investor looking at conservative growth. The stock offers a dividend yield of 3.70%, with dividends paid quarterly. The utilities solely reliant on fossil fuels might be at a risk as the regulations regarding lower carbon emissions and the rise of the renewable energy sources will take a toll on these companies. However, renewable energy will not be enough to meet the demand in the short-medium term (4-7 years). As Exelon is focused on clean nuclear energy, it will still play a big role, and in fact, it will benefit from the strict regulations for the utilities reliant on fossil fuels. The merger with Pepco will result in increased EPS and cash flows which should bode well for dividends. Also, Exelon has a robust capital investment plan for the next five years that will improve the company’s business risk profile and will result in stock valuation expansion. All of these factors make Exelon a safe and promising investment opportunity for income and growth investors. Disclosure: I am not a registered investment advisor and the views expressed in this article are my own. These views should not be taken as an investment advice or recommendation to buy or sell the shares. Investors should conduct their own due diligence before making an investment decision. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) 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.