uploads/2017/06/FE-yld-3-1.jpg

Why Hybrid Utilities’ Yields Might Be Misleading

By

Updated

Dividend yields

Hybrid utility FirstEnergy (FE) is presently trading at one of the highest dividend yields of 4.9%. At the same time, the Utilities Select Sector SPDR (XLU) currently trades at a yield of 3.9%. By comparison, Exelon (EXC) and Public Service Enterprise Group (PEG) trade at dividend yields of 3.6% and 3.9%, respectively. The SPDR S&P 500 (SPX-INDEX) (SPY) currently offers a yield of ~2%.

Though hybrid utilities might appear attractive given their yields, their dividend growth rate has been a real concern.

FE yld

Article continues below advertisement

Dividend growth

Hybrid utilities’ dividend growth severely lagged behind broader utilities in the last few years as cash retention became a necessity after the company’s worrisome earnings. Exelon (EXC) has reported a dividend growth rate of -10% in the last five years. It trimmed its per share dividends to $0.31 from $0.53 in 2Q13. FirstEnergy also cut its dividends in 2Q13 from $0.55 to $0.36 per share. However, in 2017, EXC increased its dividends by 2.7% per share compared to 2016.

Public Service Enterprise Group (PEG) increased its dividends per share by 3.7% in the last five years. In the same period, US utilities (XLU) increased their dividends by 4.2%.

Payout ratios

A company’s profit distributed as dividends among shareholders is called a payout ratio. In 1Q17, Exelon’s payout ratio was 103%, which means Exelon paid out more in the form of dividends from reserves than it earned during the period. During the same period, FirstEnergy and Public Service Enterprise Group’s (PEG) ratios were around 55% and 93%, respectively.

Top-regulated utilities like Southern Company (SO) and Duke Energy (DUK) have payout ratios around 85%–90%.

Advertisement

More From Market Realist