What's Going on With Exelon?

NEW YORK (TheStreet) -- Perhaps it took Ben Bernanke and the Federal Reserve Open Market Committee's announcement Thursday to help a beleaguered utility stock head higher.

It was after the Fed chairman and the FOMC made an unprecedented decision -- to commence a new, third, open-ended round of quantitative easing and extend the period for holding down short-term interest rates between 0 and 1/4% to mid-2015 -- that things started to turn around.

After the FOMC news, shares of Exelon ( EXC) finally moved higher, closing up 2% on significantly higher than normal volume.

After its merger with Constellation Energy earlier this year, EXC had evolved to a point where it could actually claim to be "numero uno" in the U.S. when it comes to being a competitive energy supplier and utility.

When it comes to creating one of the cleanest, lowest-operating-cost power generators, Exelon has emerged towards the top of its peer group. It also has one of the largest retail customer bases in the U.S., serving more than 6.6 million customers.

According to its eye-friendly and investor-friendly Web site, Exelon "owns approximately 35,000 megawatts of power generation, including the nation's largest nuclear fleet of more than 19,000 megawatts." Its customer-centric retail and wholesale energy business should allow the company to grow the energy products it offers customers in 46 states.

In addition, the "new company" claims to be the nation's second-largest regulated distributor of electricity and gas, serving millions of customers in Maryland, Illinois and Pennsylvania.

EXC said it now owns three "utilities -- BGE, ComEd and PECO -- which remain headquartered in Baltimore, Chicago and Philadelphia, respectively, and are focused on safety, customer service, reliability and continued infrastructure investment in their service areas."

Have I mentioned the company pays a luscious $2.10-per-share annual dividend? With a purchase price of EXC shares at $35.50, that gives an investor a yield to price of nearly 5.92%. That's exceptionally appealing when you consider that thanks to the Fed's Thursday decision, the yield on the one-year U.S. Treasury bond is down to 1.76% and will probably fall somewhat lower in the weeks ahead.

People with older maturing bonds, like my friend at the fitness center who asked me Wednesday how he can replace the income from a municipal bond he's owned that paid him 4% tax-free, are stymied. That's why I decided to write this article, because EXC is one of the few major utilities that isn't overpriced at the present time.

With generous dividend-paying energy companies like Chevron ( CVX) hitting new 52-week highs and their yield-to-price falling to 3.09%, I thought it was time to find an undervalued company that was paying close to 6%. Exelon fits that description completely.

There are things about EXC that do concern me. Due to its aggressive mergers and acquisitions, it has compiled an uncomfortable total debt load of $19.45 billion, as of its most recent quarter ending June 30. This gives it a total debt-to-equity ratio of over 87. A high debt-to-equity ratio usually is indicative that a company like EXC has been aggressive in financing its growth with debt. No doubt that's a fact.

The risk with growth by increasing debt is that it can result in unstable earnings. EXC saw its most recent quarterly earnings (year-over-year) drop by nearly 54%, partially as a result of additional debt service costs and interest expense.

This is also why its dividend payout ratio is a high 87%. If it doesn't substantially increase revenue and earnings this payout ratio would be difficult to sustain and could force a dividend reduction. That may already be baked into the current price.

Savvy investors know the cost of massive debt financing may outweigh the return that the company generates on the acquisitions and mergers. In Exelon's case, its utilities plus the addition of Constellation Energy's revenue should more than offset that concern.

EXC saw revenue growth in its last reported quarter surge by 32.4%, no small feat. Its total cash was only $1.35 billion as of June 30, but its operating cash flow, a very important number, was a healthy $6.57 billion and rising.

Here's a chart showing the four-year history of Exelon's share price compared to its revenue per share.

EXC Chart EXC data by YCharts

Looks like both have bottomed and are moving up.

For comparison sake I looked at the key financial statistics for another big utility, Southern Company ( SO). To me its balance sheet looked worse than Exelon's, with a higher debt-to-equity ratio of almost 115. Ouch!

Southern's yield to its current price of $45.92 was only 4.27%. Its quarterly revenue growth was not growing at all, but was actually a minus 7.5%. This helped me feel much better about EXC, whose earnings and revenue growing potential has not yet been realized.

If you're looking for another company with a decent dividend yield that appears to be seriously underpriced, take a look at Caterpillar ( CAT). With a forward PE ratio of less than 9 and a price-to-earnings-to growth (PEG) ratio of only 0.52, CAT looks more like a steal at $90 a share.

The demand for CAT's products and machinery should be growing in the year ahead now that the world's central banks have opened wide the money spigots and gone all-out to spur industrial growth and job-creating infrastructure and mining projects.

With its $2.08 annual dividend, if you can buy CAT shares at $90 your dividend yield would be 2.31%. That's better than the 10-year Treasury bond!

But if you'd prefer an almost 6% yield and ownership in one of the fastest-growing power companies in America, you may want to start accumulating shares of Exelon before the rest of the yield-hungry investment market catches on.

As of the time of publication the author had no holdings in any of the companies mentioned in this article.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Jim Cramer and Stephanie Link actively manage a real money portfolio for his charitable trust- enjoy advance notice of every trade, full access to the portfolio, and deep coverage of the latest economic events and market movements.

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