Exelon is engaged in energy generation and delivery, operating 19,000 megawatts of nuclear energy capacity in the United States and a total of 35,000 megawatts. The company currently pays a quarterly dividend of $0.525 but has recently announced a 41% cut beginning in the second quarter of this year. Based on the old dividend the yield sat at 6.3%, but with the cut the yield has dropped to about 3.7%.
Can the company support this new, lower dividend or is another cut imminent? 2012 was a particularly bad year in terms of both net income and free cash flow. Net income fell to $1.16 billion, down from $2.495 billion in 2011 and the lowest value since 2005. Free cash flow plummeted to just $321 million. Using the new dividend this puts the payout ratio with respect to net income at 87% and well over 100% with respect to free cash flow.
Now, 2012 may be an anomaly and profits may rise back to previous levels. But if this takes a few years then the new dividend may need to be cut again. Exelon has a tremendous amount of debt, over $19 billion, and significant pension liabilities as well. The company paid nearly $1 billion in interest in 2012, and this number has risen from $832 million in 2008. There's far too much uncertainty going forward to consider this company, especially considering the dividend yield after the cut takes effect isn't even all that high. I'd avoid this one until profitability improves and the dividend is better supported.