An Opportune Time to Buy

03/12/2013 10:15 am EST

Focus: STOCKS

Roger Conrad

Founder and Chief Editor, Capitalist Times

Although it may sound like a contra-indicator, Roger Conrad of Utility Forecaster says that the dividend cut at this nuclear energy company presents a rare buying opportunity.

Buying utility stocks after dividend cuts is a time-tested strategy for big long-term gains. And I expect nothing less from here for our Growth Portfolio Core Holding, Exelon (EXC).

The company had warned for several months that it would cut its payout to maintain balance-sheet strength, unless North American wholesale power prices recovered in 2013. Exelon derives more than half of its income from this unregulated business, with the rest coming from regulated utility operations.

The 41% dividend reduction is a tacit admission prices are likely to stay low. So is management’s 2013 earnings target of $2.35 to $2.65 per share. That is down from $2.82 earned in 2012, reflecting the expiration of hedges locking in higher selling prices.

The silver lining is that the $700 million saved from the dividend cut allows Exelon to effectively wait out current power-price weakness without sacrificing its ability to profit from the inevitable recovery.

The company now controls 20% of US nuclear generating capacity, thanks to last year’s acquisition of Constellation Energy.

Its plants had another stellar year, running at 93% of capacity. And unlike the natural gas-fired power plants they compete with, the nukes have a record of stable operating and fuel costs spanning decades.
 
And they emit no carbon dioxide (CO2). An Obama administration tax on CO2 or tighter regulation of emissions would boost the cost of gas-fired power overnight.

Exelon will benefit by the eventual export of North American liquefied natural gas, coupled with surging demand at home. And the likely result will be power prices back at normal (higher) levels, as well as a gigantic lift to Exelon’s margins on power sales.

That’s a bet almost no one is making now. But it’s plenty of reason to own this stock, particularly now that the company has resolved near-term financial pressures. Buy Exelon up to 35.

Related Articles:

Look for Rising Payouts in Utilities

The Uranium Sector is Heating Up

Tough Sell for a Nuclear Energy Radical

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