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.
Or you could, today, buy the
EXELON 5.625%35 NOTES DUE 06/15/35 at $118.29 and have a 4.75% current yield and a 4.35% yield to maturity. Dividend cuts then become an exercise in the company protecting your interest payments that are provided by the bonds. You'll sleep better.