Utilities have big capex costs. They have to borrow for that. Therefore, an investment grade credit rating is extremely important. If a utility loses investment grade, borrowing costs go way up due to the size of what it must borrow. So a dividend cut preserves investment grade. If investment grade is preserved, Wall St. will approve and the price will rally in anticipation of future rising dividends. CEO must preserve the investment grade rating. Hence it is better to invest in the corporate bonds of companies that pay good dividends. When trouble comes, the CEO will cut the dividend in order to protect borrowing capacity, which means protecting the existing bonds as well.
I listened to the conference call yesterday ... maybe I need to listen again, but I did not hear anything that made it sound like a dividend cut was imminent. What I heard was:
1) A large amount of CapEx spending was pushed out to improve financial condition
2) The expectation was for power demand to increase
3) Opportunity for rate increases/margin expansion
The CEO did say that preserving EXC's investment grade rating on all bonds issued (by any operating division) was "job #1". Providing return to shareholders was #2.
In response to a question regarding the dividend what I heard (and like I said maybe I need to listen to the call again) was that the dividend was secure for now, but that if conditions did not improve (as per the projections the company is making - increased demand and increased margin) then at some point the dividend might have to be cut and that a very high payout ratio (say 90%) was unrealistic.
What did you folks hear?
I need to read the transcript but from everything I have read, your interpretation is correct. I believe he did not mention the dividend cut on its own but that he was simply responding to a question about a possible dividend cut if conditions deteriorate further.
I have a limit order to buy at $32 and will put in another one at $30 since I don't believe they will fully cut the dividend (if they cut it at all), that natural gas prices will make their way up to $5 over the next 18 months, and that the worst will be over in the next 6 months.
I should note that I am investing money I won't need for at least a few years and that I am going to hold this for at least 4-5 years.
I'm a long, but I wanted to point out that coming up with excuses for the stock price to go up is a form of cognitive dissonance. You don't want to be trading off of that, and you don't want to be buying- or selling- today.
Go for a jog, get some exercise, think about your other investments. Then come back and make a decision.
A dividend cut announcement will likely be the *final* 5-10% drop.
Credit Suisse has the following take on the div cut:
Where could the dividend go? If EXC decides to cut, we would suggest a 40-50% reduction that would bring the
consolidated payout ratio down to 45-50% and ExGen payout to 25-45% in 2014, which we think is a more reasonable level
for a commodity cyclical business. A cut at this level would annually save ~$800 MM of cash, cut our FCF deficit in half
(which has been a concern to us) and create a stable platform for EXC to eventually establish a return of cash strategy in a
When? We appreciate mgmt's confidence in a power market recovery but the affordability issue will persist even with a
recovery; waiting until 2Q13 offers some hope but the uncertainty in the meantime will not help the stock price.
Our revised 2012-15 EPS estimates are $2.84,$2.45,$2.29, $2.68 from $2.78, $2.48, $2.30, which now also assumes EXC
lowers the dividend by 40% in 2H13. We think the stock will do poorly with a dividend cut but could also create a good
So there is plenty of room to protect the investment grade credit rating, which is what the CEO must do. My point is that people who depend on investment income from utilities are better off buying utility bonds in companies that have a substantial dividend. By cutting the dividend, the CEO protects the bond payments. No cognitive dissonance in that...just good solid risk aversion.
Well said. I will keep my stock on long term basis. This is a big utility firm, and I firmly believe the company will not vanish in a decade or so. What the hik, I have only a couple of thousands share.
Div is declared? I guess they can go back on it? i think div cut is 2013 potential maybe..
who knows they could sell assets, also may be on a raider's "radar" now like Ichan or Buffett etc.
here is news release from last week for the .525
The Board of Directors of Exelon Corporation declared a regular quarterly dividend of $0.525 per share on Exelon’s common stock. The dividend is payable on Dec. 10, 2012, to shareholders of record of Exelon at 5:00 p.m. New York Time on Nov. 15, 2012