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At The Crossroads Of Emerging And Frontier Markets

Summary Emerging Markets are no longer one cohesive group. The BRICs are each a separate investment case, heading in different directions. Smaller emerging and some frontier markets deserve investing consideration for their growth potential. EMFM appears to be the most compelling out of several ETF options available. Speaking on March 7, 2014, at the National Association of Pension Funds investment conference in Edinburgh, Laurence Fink, chairman and CEO of Blackrock (NYSE: BLK ) brought up the subject of emerging markets . “We talk about emerging markets as if they are one compatible, cohesive market – but within emerging markets we have some very good examples of well-run countries, and we have some real garbage… I do believe we will see much more granularity in the investment of the developing world and we will stop talking about emerging markets as an asset class.” As an example, Mr. Fink pointed to the way the UK investors have a different focus than those in the rest of Europe. Blackrock is one of the largest asset managers and the largest ETF provider in the world, and the words of its visionary CEO were heard loud and clear. The Decade of the BRICs To be fair, Mr. Fink’s idea was not new, but the market’s participants have been slow to recognize it until the recent few years. It’s hard to argue that the previous decade was the Decade of Emerging Markets, or more precisely, the Decade of the BRICs. Brazil, Russia, India, and China – the four largest emerging economies – have taken the lead, and others followed, creating a high correlation of returns throughout most of the 2000’s. The story in the past three years or so has been quite different. Chinese slowdown, highlighted by the real estate bubble and the shadow banking near-crisis, is well-documented. The growth potential is still there, but it’s not what it once was. Brazil has had its share of problems, where higher inflation, infrastructure problems, economically unfriendly government policies, lower commodity prices, and moderated growth had their negative effects on the economy and the local equity market. India, on the other hand, has enjoyed a significant resurgence last year following the election of President Modi. Investors see his proposed sweeping economic reforms a cause for optimism, driving Indian market to one of the best performances of 2014 around the globe. India is a major net importer of energy, which is another boon to its economy right now. Finally, Russia deserves a special mention. In April, 2014, I published an article entitled, Clear and Present Danger to the World Economy . Its basic and controversial thesis was that, in the wake of Russian annexation of Crimea, a huge macro shift was underway, which was likely to cause higher defense spending, European shift away from Russian gas, higher volatility in European equities and energy prices, and ultimately much lower Russian equities and ruble. The controversy came from the fact that the Russian equity market and ruble have already experienced a substantial slide in the previous 6-week period. Some Seeking Alpha readers felt that those were caused solely by the headline risk, that Europe and the US were too weak politically for economic sanctions and that the Russian market was ripe to buy on the dip. Perhaps that thesis is no longer controversial, as all these macro themes have been playing out nicely over these nine months, and the recent monumental crash in Russian market and currency have been exacerbated by the equally monumental and unpredictable oil market crash. There are now some voices, as there always are, that are calling the bottom of the Russian market. After all, their argument is that the oil slide has slowed down and can’t continue forever, while Russian equities are currently some of the cheapest in the world on the P/E basis, some with enticing dividend yields, to boot. However, I put myself squarely into the bearish camp yet again, arguing that the Russian equities are cheap for a reason. A short-term oil price bounce can certainly provide a short-term relief to the stocks, just like the Chinese currency support announcement and a Central Bank dramatic rate hike from 10.5% to 17% provided a short-term stub to the ruble’s collapse, but the macro situation has not changed. The Western sanctions are working well, the Russian economy is suffocating, Europe’s dependence on Russian gas is decreasing, and the 17% interest rate is destroying local businesses faster than falling oil. The coming downgrade of the sovereign debt to junk and likely bankruptcies of the more vulnerable Russian businesses [or government bailouts as they have already done, in fact, with Rosneft ( OTC:RNFTF )] will merely accelerate the process the way the oil collapse has. The dividends, too, are about 50% less enticing than a year ago when converted into dollars and can disappear at any moment as large payers start to run out of cash. And any recent rumors of possible easing of sanctions have been quashed, with political and military situation in Eastern Ukraine not only not getting better, but worsening and looking to get much worse yet before getting any better. In fact, sanctions will almost inevitably get tougher yet. The only possible remedies to the Russian economic malady would be either complete about-face on Ukraine and Crimea, wholesale replacement of government leadership, or dramatic and sustained surge in oil prices, and I consider all three highly unlikely in the foreseeable future. (click to enlarge) The State of Emerging Markets But I digress. Regardless of the special situation in Russia, it would appear that the BRICs are no longer leading, nor their returns are correlated to each other or to other emerging markets. The chart above shows a comparison of 3-year returns of the BRICs against S&P 500 and diversified Emerging Markets using ETFs as proxies. iShares MSCI India (BATS: INDA ) has clearly outperformed its peers, with iShares China Large-Cap (NYSEARCA: FXI ) not too far behind, lagging India in the past six months only, while Market Vectors Russia ETF (NYSEARCA: RSX ) and iShares MSCI Brazil Capped (NYSEARCA: EWZ ) have posted steep losses in the cumulative 50% range. The fact is that China now possesses the second largest GDP in the world, and the other three BRICs are also in the top 10 in the world, according to the World Bank . While GDP is not part of the standard definition of emerging markets, a case could be made that the BRICs no longer fit the category where investors expect higher rewards for higher growth, albeit at a higher risk. Most of the risks commonly associated with emerging markets are still there, but the growth may never be the same. It is also clear that investing in each of the BRICs should be considered separately, to Mr. Fink’s point. It doesn’t mean that there is no longer need for diversified emerging markets mutual funds of ETFs, such as the popular iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) or Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) . Just as there’s a dedicated UK fund, there’s still a business case for investment in a Western European or Developed World Equity fund where a small portion will be allocated to the UK. But which time is now: to pick specific countries or go with a broad group? For the purposes of diversification and to minimize a small-country political, headline and currency risks, a broader group remains a prevalent choice. However, the country selection choice in such funds is of paramount importance. Another article I wrote over a year ago, Emerging Markets: The Next 11 – Where To Invest , makes a reference to N-11, the “next 11” emerging economies after BRICs. It was first presented nearly ten years ago by the former chairman of Goldman Sachs Asset Management Jim O’Neill, perhaps best known for coining the BRIC acronym. The list is still very relevant, although the investment options for some of these countries are very limited. Frontier markets – generally defined as less developed and smaller than emerging markets – have emerged (pardon the pun) in recent years as an alternative to investors seeking growth rates similar to the emerging markets of the past decade. The two broad, dedicated frontier ETFs available today – Guggenheim Frontier Markets (NYSEARCA: FRN ) and iShares MSCI Frontier 100 (NYSEARCA: FM ) – have had differences in performance, as the graph below shows, precisely due to the country selection. It’s worth noting that in May, 2014, due to MSCI change in its index methodology, Qatar and UAE have become Emerging Markets, and the FM ETF had to rebalance what was about a third of its portfolio previously. Perhaps one of the key issues of frontier markets from investing standpoint is the tradeability and liquidity of securities. Many countries have laws restricting foreign investment or trading on local exchanges. China has only recently opened access to their Mainland A-shares. Saudi Arabia may finally be opening their market to foreigners in 2015, and no less than 3 dedicated ETFs are in SEC registration – from Blackrock, Global X, and Market Vectors. What often happens is that ETFs have to use stocks traded on Western exchanges or even Western companies doing business in frontier countries rather than local pure plays, for the sake of lowering transaction costs, avoiding legal issues, and increasing liquidity. Searching Beyond BRICs As investors – and then ETF issuers – started to look beyond BRICs for growth, the boutique firm EGShares was first to bring such a fund to the market as early as August, 2012 – EGShares Beyond BRICs (NYSEARCA: BBRC ) . Its focus is on smaller emerging markets, as advertised, and excludes BRICs, South Korea, and Taiwan. The last two countries are considered developed by some methodologies, so that VWO based on the FTSE index excludes Korea, for instance. The largest countries represented in BBRC’s 90 holdings are, in order, South Africa, Malaysia, Qatar, Indonesia, Nigeria, Thailand, Poland, Turkey, and Chile. State Street soon followed with SPDR MSCI EM Beyond BRIC ETF (NYSEARCA: EMBB ) , but less successfully. Using MSCI Beyond BRIC index, this ETF has a similar country selection, except South Korea and Taiwan are included and combine for about 30% of the portfolio. Greece is also a constituent, albeit small, due to its downgrade to emerging markets by MSCI. BBRC currently has $281M of assets and charges 0.58% expense ratio, to EMBB’s only $3M and 0.55%. The latest newcomer in the category is the iShares MSCI Emerging Markets Horizon ETF (BATS: EMHZ ). It debuted in November, 2014, and is benchmarked against the MSCI Emerging Markets Horizon Index, which is designed to track the equity performance of the smallest 25% of countries by market capitalization in the universe of MSCI Emerging Markets Index countries. Naturally, this criterion excludes the BRICs. Mexico, Malaysia, Indonesia, Thailand, Turkey, Poland, Chile, Philippines, Qatar, Peru, Colombia, UAE, Greece, and Egypt are included in the benchmark. As the thinly traded fund is trying to pick up more than the $2.3M AUM it has accumulated so far, it sports the smallest expense ratio of its peers of only 0.50%. However, all these choices, while focusing on smaller emerging markets, completely disregard the promise of frontier markets. Best of Both Worlds Enter Global X Next Emerging & Frontier ETF (NYSEARCA: EMFM ) . Global X has carved out a nice niche in the ETF space specializing in smaller Emerging and Frontier Markets. It is no wonder then that they teamed up with German indexer Solactive , which is known for indexing alternative investments, to bring this ETF to market in November, 2013. The ETF and the underlying index also excludes BRICs, South Korea, and Taiwan, but includes quite a cross-section of Emerging and Frontier markets listed below, living up to its aptly chosen ticker. The portfolio consists of 218 stocks that represent 34 countries, making it much broader than the choices described above. Generally, the Frontier markets have shown low correlation to the developed world and among themselves, making their inclusion in portfolios more attractive. In particular, there’s a meaningful exposure to Africa and Middle East that other options lack. With the exception of South Korea (by choice) and Iran (by necessity), all the N-11 countries are included. That type of diversification means that no position takes up as much as even 2% of the portfolio, and the top 10 holdings account for only 14%. Some of the largest holdings trading in US include Argentinean e-commerce company Mercadolibre Inc. (NASDAQ: MELI ) and energy giant YPF SA (NYSE: YPF ), Panamanian airline Copa Holdings (NYSE: CPA ), and Mexican telecom America Movil (NYSE: AMX ). To bolster its investment case, Global X favorably compares EMFM portfolio’s revenue growth to that of EM or US small-caps, as well as EMFM’s population, market cap and GDP vs. the world. The fund has attracted a very healthy $136M in assets, with about average expense ratio for the group of 0.58%, despite a broader portfolio. A 1.70% dividend is also a nice bonus. New Registration On October 30th, 2014, iShares has filed for a new ETF registration. The iShares MSCI Emerging Workforce ETF is another potential contender in the space and takes a unique approach to developing-market investing that focuses specifically on demographics. The underlying index is derived from the MSCI Emerging + Frontier Markets Index and targets countries that have “favorable demographic criteria,” where the population’s average age skews younger and better educated as well as countries with high rates of urbanization and less reliance on agriculture. The prospectus noted that the index had 467 companies as of Oct. 1, and included the markets of Argentina, Brazil, Chile, China, Colombia, Egypt, Indonesia, Kuwait, Malaysia, Mexico, Peru, Philippines, South Africa and Turkey. Once the demographic-selection criteria are applied to achieve an initial list of markets, countries representing less than 0.25% of the index are removed, and weights of individual countries are capped at 20% of the index at rebalancing. (click to enlarge) Timing and Risks Developing Markets cumulatively did not have a good year in 2014. The strong dollar, falling energy and commodity prices, the spread of Ebola in Western Africa, and geopolitical threats with the rise of ISIS in the Middle East and the war in Ukraine have all been contributing factors. EMFM is not immune to these risks, and it’s basically flat over the last year, but it exhibits the lowest volatility of its peer group. At the onset of the new year, with the fund rebounding somewhat from the steep losses in the fall, now may be an opportune time for the long-term investor seeking growth away from the developed world and the BRICs. Conclusion Investors looking to add exposure to developing markets should look at options that exclude BRICs and consider each BRIC as a separate investment case. There are several ETF options in the space, with EMFM being perhaps the most compelling from the diversification, liquidity and risk/reward standpoint. Timing may also be right to consider adding it to one’s portfolio.

How To Build A Portfolio With Less Risk Than The S&P 500

Summary When measuring risk adjusted returns over a long time period, SPY regularly beats individual investors. Due to high liquidity and small spreads, SPY is a better investment for investors that don’t want to worry constantly. For investors seeking more thorough diversification, I’ll lay out my portfolio plans. The long term bear case for SPY is a doomsday scenario, short term cases are arguments for market timing. Investors dealing with practical constraints such as trading costs have extremely low chances of beating SPY for risk adjusted returns. Every investor wants to be able to beat the market, but success is difficult to judge. Posting larger gains than the market by taking on additional risk is not the same thing as outperforming the market. I believe investors can occasionally struggle to see the forest because they are so caught up in the trees. Without stepping back, it may be difficult to judge how much risk is actually involved in any given portfolio. I think if we compare portfolios over a very long time period, many investors could agree that the deviation of returns is a viable metric for assessing risk. Under CAPM (Capital Asset Pricing Model), investors use Beta to establish the level of risk. I like that method, but it still has some substantial short comings. The theory assumes that every investor is holding the market portfolio and that diversification is in full effect. That causes some problems when we start assessing the required return. If the investor is not actually fully diversified, then the portfolio contains risks that could have been mitigated by better diversification. Making SPY the cornerstone Most textbooks will say that the S&P 500 is a viable proxy for “the market”. Since the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) is heavily focused on large cap U.S. equity, I don’t think that SPY should be seen as a proxy for every investment security. However, I do believe that SPY (or a similar ETF) should be the corner stone of most portfolios. Why SPY makes sense Even though SPY does not represent the entire market, it does represent the largest parts of the U.S. economy and many of the companies have global operations. If an investor wants to rapidly gain diversification to the market, SPY is the best place to start. The advantage of companies with global operations is that the ETF contains some of the diversification benefits of being exposed to foreign economies. Liquidity and spreads SPY offers investors extremely high levels of liquidity which lead to small spreads and a relatively easy time entering or exiting positions as necessary. On a risk adjusted basis When we adjusted for the level of risk, as measured by the deviation of returns, we find that SPY has a lower level of volatility than most ETFs. There are some ETFs with less deviation, but most of those ETFs have several of the same companies. If an ETF holds several of the same companies as SPY and posts high correlation, similar total returns, and similar levels of risk, then that ETF is a viable alternative to SPY. I’m perfectly fine with using alternatives to SPY, but I wouldn’t want to build a portfolio that did not use either SPY or one of the many similar ETFs. My strategy for building a portfolio I’m in the process of building a new retirement portfolio. The account will be tax advantaged. The difficulty for investors in opening a new account is that the balances will be relatively low. Because the balances are relatively low, trading fees are a significant detriment to the success of the account. Even if an investor has a substantial amount of money outside of the account, it won’t make a difference for the individual account. Since the new account has less capital and thus is more susceptible to trading fees, the appeal of using ETFs is even more substantial. My ideal ETF portfolio looks something like this: 30 to 50% to large cap companies (possibly split between 2 ETFs) 15% to 25% in bonds (part international, part domestic) 10% to 20% in international ETFs (probably using at least 2) 5% to 15% between precious metals and natural resource companies 10% to 20% to REITs Some ETFs that I think merit automatic consideration for those slots are listed below. In my opinion, these are some of the first ETFs investors should consider when seeking the exposures listed above. Large Cap: The Schwab U.S. Large-Cap ETF (NYSEARCA: SCHX ), the iShares Core S&P 500 ETF (NYSEARCA: IVV ) and the Vanguard S&P 500 ETF (NYSEARCA: VOO ) Bonds-International: The iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEARCA: EMB ) and the PowerShares Emerging Markets Sovereign Debt Portfolio ETF (NYSEARCA: PCY ) Bonds-Domestic: The Vanguard Total Bond Market ETF (NYSEARCA: BND ), the iShares Core Total U.S. Bond Market ETF (NYSEARCA: AGG ), the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ), the SPDR Barclays Capital High Yield Bond ETF (NYSEARCA: JNK ), the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEARCA: LQD ) and the iShares U.S. Preferred Stock ETF (NYSEARCA: PFF ) -Note: PFF uses preferred stock International ETFs: The Vanguard FTSE Developed Markets ETF (NYSEARCA: VEA ), the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ), the Schwab Emerging Markets ETF (NYSEARCA: SCHE ) and the iShares MSCI EAFE ETF (NYSEARCA: EFA ) Precious Metals: The SPDR Gold Trust ETF (NYSEARCA: GLD ), the iShares Gold Trust ETF (NYSEARCA: IAU ) and the iShares Silver Trust ETF (NYSEARCA: SLV ) Natural Resources: The Market Vectors Gold Miners ETF (NYSEARCA: GDX ), the FlexShares Morningstar Global Upstream Natural Resources Index ETF (NYSEARCA: GUNR ), the Energy Select Sector SPDR ETF (NYSEARCA: XLE ) and the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP ) REITs: The Schwab U.S. REIT ETF (NYSEARCA: SCHH ), the iShares U.S. Real Estate ETF (NYSEARCA: IYR ) and the Vanguard REIT Index ETF (NYSEARCA: VNQ ) As you can see from my desired exposures, the largest position by far will be substantially represented by SPY or a similar ETF. The position in natural resource companies will also duplicate some of the same stocks that I will be holding through the U.S. large cap ETF. For investors seeking to reduce risk below the levels created by SPY, the most likely way to do it still involves a fairly substantial position in either SPY or another similar fund. The strategy relies on using relatively low levels of correlation in the other investments. If the positions are relatively small, their correlation is more important than their individual volatility. Rather than building from the ground up, investors should be looking for incremental ways to reduce risk. Small positions in other ETFs have the opportunity to provide that incremental benefit. Rebalancing I will probably rebalance on a quarterly basis, but I might consider doing it as frequently as monthly. The portfolio I’ve laid out above suggests that I would probably be using at least 9 ETFs in my portfolio. The top four positions in the list would each be represented by two ETFs. The REIT position might be through a single ETF, depending on what I can find. First looks When I run my first inspection on an ETF as a candidate, I usually compare the standard deviation on daily returns to SPY. That gives me a quick estimation of the correlation between the two ETFs. If an ETF is not liquid and no shares trade hands on days when SPY jumps up or down as investors are scared to leave their positions, that is an unappealing aspect. Therefore, I also want to know about the volume of the shares being traded. Don’t be fooled into thinking that an average trading volume of 10,000 shares implies that there is enough liquidity for statistics to be valid. I’ve seen ETFs with reasonable average trading volumes post days with 0 shares changing hands. If no shares trade hands, it results in invalid statistics. If investors resume trading the following day at a significantly higher or lower price, it may understate the correlation by assessing the price movement to the wrong day. Yield One of the things I love about SPY is the distribution yield, currently 1.87%. One of my goals in planning for retirement is to get to the point where I can live off the dividends. Yes, I could use investments with substantially higher yields, but that often means additional risks. In my portfolio, I may be able to structure it to have a higher yield, but it won’t be a major factor since the money is all staying in the retirement account. Rich Dad, Poor Dad I believe every investor should read through Rich Dad, Poor Dad. It’s a fairly simple book and contains a great deal of common sense, but I still meet people every day that don’t understand the difference between assets and liabilities in their personal life. The most basic definition is that an asset should put money into your pocket. A liability would remove money from your pocket. The problem with buying into companies (or ETFs) with no dividend yield is that they are not directly putting money into your pocket. Selling shares to create your own dividends Every finance book dealing with economics will mention that investors have the option to sell their stocks and create their own dividend when they need the money. While that is true at a technical level, it ignores behavior finance. Investors are tempted to buy when the market is high and sell when it is low. If the investor can live off the dividends, they can avoid trading mistakes. Security SPY offers investors so much diversification through international exposure, that betting on SPY going down over a very long period is betting on the world falling apart. While individual companies can and do fall from grace (remember Enron), the system behind SPY is strong enough that investors have a very reasonable case to ignore the market and just keep dollar cost averaging into their positions. Market timing is absurdly difficult Attempting to time the market is a losing game. Yes, there are periods where the market crashes. That’s why I believe in adding a few other positions to the core position in the S&P 500. I love diversification, but I don’t see a viable argument against holding SPY over the long term. If the companies comprising the S&P 500 get crushed, what investment is truly safe? I don’t believe gold or the USD will hold substantial value in a hypothetical scenario where the S&P 500 gets destroyed. If Exxon Mobile (NYSE: XOM ) and Chevron (NYSE: CVX ) are both getting destroyed, how would you get to the store for groceries? If Wal-Mart (NYSE: WMT ) is getting crushed, what retail stores are surviving? In a doomsday scenario, I don’t see many investments holding their value. How I plan to handle it When I’m able to transfer money into the account, I won’t try to time my entry into positions. Money goes in, assets get purchased. That doesn’t mean I’m willing to cross a huge spread, but that isn’t a concern with SPY. Even though I have a desired outline for my portfolio, the only position that’s really secure is that I’ll use either SPY or another ETF with very similar exposures. The point of adding other ETFs is that they provide benefits to the core position. If I can’t find enough ETFs that provide complimentary positions to SPY, I’ll just reallocate that position to even more S&P 500. Using SPY to avoid commissions If I didn’t have access to trading many ETFs without commissions, I wouldn’t expect the benefits of further diversification to outweigh the trading costs. If I hold 9 ETFs and rebalance quarterly, I’m looking at 36 trades per year. Assuming $10 per trade, we are talking about $360 per year. In a new retirement account with a starting balance of around $10,000, that’s a huge chunk. The difference between $40 and $360 over the course of the year is comparing .4% to 3.6% in expenses. Beating SPY in risk adjusted returns through active selection is very difficult. If an investor has to beat another 3.2% to cover the trading fees, it becomes nearly impossible. Remember, returns must recognize risk, so buying a single security that does very well is still taking on an enormous amount of risk. If I was paying commissions If I learned tomorrow that I would not be able to trade without commissions, I would make one trade upon getting the money into my retirement account. I would run a portfolio that was at least 80% SPY. Until I had over $50,000 in the account, I wouldn’t even consider reducing the SPY position. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis. The analyst holds a diversified portfolio including mutual funds or index funds which may include a small long exposure to the stock.

Exelon Set To Grow And Reward Investors In The Long Run

Summary EXC’s strategic investments in regulated operations and recent acquisitions will trigger decent growth and stability in revenue, earnings and cash flows. EXC will better support its dividend payments to remain an attractive pick for dividend-seeking investors. Stock offers attractive dividend yield of 3.3%. Owing to volatility in natural gas and power prices, Exelon Corporation’s (NYSE: EXC ) competitive business operations have been hurting its earnings growth prospects. In its efforts to fight back the challenges in its competitive power operations, the company has started pursuing an intelligent strategic growth formula that focuses on strengthening its regulated operations. As a matter of fact, these strategic initiatives, focused on diversifying its power generation portfolio through strategic acquisitions and through the sale of its competitive assets, will strengthen its long-term growth prospects. I believe that by increasing regulated operations, the company will create stable earnings and a secure cash flow base, which will ensure the security of its attractive dividend payment policy in the long term. EXC Making Right Moves to Grow In Long Run The company has a large operational base with both competitive and regulated operations. Competitive business operations contribute more than 40% towards its total earnings. Weakness in the company’s competitive business operations in recent years due to low and volatile power prices has hurt EXC’s consolidated earnings growth prospects. In its efforts to overcome the backdrops of its competitive operations, the company has carved out an intelligent strategic growth plan to divest most of its competitive assets and grow its power generation portfolio through acquisitions. The company has signed definitive contracts to sell the non-core assets of its generation segment for $1.4 billion . And out of these $1.4 billion proceeds, approximately $1 billion will be used to fund the acquisition of Pepco Holdings Inc. (NYSE: POM ). The POM-EXC merger agreement, which recently reached a settlement in a hearing before NJ BPU (New Jersey Board of Public utilities), is expected to close in the second or third quarter of 2015. Upon its completion, the merger will increase the scale of EXC’s regulated operations. An increase in regulated operations and completion of the merger will bring stability to its cash flow base. Along with that, the combined utility business is expected to have a rate base of approximately $26 billion , which will portend well for its future sales growth. Also, I believe the $6.8 billion POM-EXC merger will positively affect its earnings growth rate, and EXC is expected to enjoy an earnings growth rate of 4%-6% in the long term. Moreover, EXC is working to improve its electricity generation portfolio and reduce its operational risks. The company completed the acquisition of Integrys Energy, which will strengthen its operations. Since many of Intergrys’ customers are in the same regions where EXC has significant power generation operations, the acquisition will benefit the company by matching generation with load capacity. Talking about the significance of the acquisition, Kenneth Cornew, the president and CEO of Exelon Generation, said : “The combination creates a stronger, more diverse business that is well positioned to compete for customers in retail electricity and gas markets across the country. It vastly expands our gas portfolio increasing our load by 150 BCF annually.” Owing to the potentials of the company’s strategic growth efforts, I believe the management’s expected rate base growth of $24.7 billion by the end of 2017 is achievable, which will add well towards its sales and earnings numbers in the long-run. The following chart shows the company’s expected rate base growth from 2014 to 2017. Source: Company’s Earnings presentation In addition to the successful acquisitions, EXC is considering options to close its nuclear power operations. Although the company has a widely extended nuclear power generating portfolio, but owing to their cost-competitive nature, its nuclear facilities are putting EXC at a disadvantage as compared to its peers. The company has highlighted the need for government support on nuclear plants in its recent statement on a power plant closure in Illinois. Although the government hasn’t responded to this statement yet, I believe that if the state doesn’t pursue the Regional Green House Gas Initiative (RGGI) or comparable market based programs to support carbon-free nuclear energy in Illinois, EXC should shut three out of its eleven nuclear plants in the state. Potential rewards for Income-Seeking Investors EXC has returned a significant proportion of its annual cash flows to its shareholders through healthy dividend payments. The company currently offers an attractive dividend yield of 3.30% . Given the fact that the POM acquisition will soon raise its level of regulated operations, EXC will remain attractive for its dividend-seeking investors due to the attainment of a stable cash flow base. As a matter of fact, a stable cash flow base will provide sustainability and security to the company’s long term dividends. The following chart shows EXC’s dividend per share payments in the last two years and for future years, based on my estimates. Source: Company’s Yearly Earnings Reports & Equity Watch Estimates Risks With an increase in the level of regulated operations, the company will be exposed to the risk of increases in regulatory restrictions by federal and state regulators. Moreover, EXC’s competitive assets will continue to face the risk of volatility in power prices. In addition to that, failure to integrate new acquisitions may undermine the company’s expected earnings growth potentials. Conclusion Owing to the company’s strategic investments in regulated operations and recent acquisitions, I believe EXC will witness decent growth and stability in its revenue, earnings and cash flows. Moreover, the company will be able to better support its dividend payments to remain an attractive pick for dividend-seeking investors. The stock currently offers an attractive dividend yield of 3.3%. Also, analysts have anticipated a decent next five-year earnings growth rate of 4.40% for the company.