One of the Last Remaining Dividend Stock Bargains
April 29, 2011 – by Richard Band
The verdict is in: Federal Reserve Chairman Ben Bernanke’s first press conference was a “success.” How do we know? Well, stocks flew up again yesterday, with the Dow and the broader S& Poor’s 500 both closing at fresh highs for the 25-month-old bull market. Isn’t that all that matters anymore?
By Wall Street’s lights, yes. And I’ll be the first to admit, it sure feels better to see my brokerage balances expanding rather than shrinking. For those of us who care about the prices we pay, though, the market’s steep climb since mid-March makes it a lot more difficult to find good places to park new money.
At yesterday’s close, the dividend yield on the S&P 500 had shriveled to 1.88%. That’s not fatally meager (yet), but we’re getting close. Last April, just before stocks nosedived into early summer, the S&P yield sank to 1.82%.
The low yield at the October 2007 market peak was 1.76%. So there’s some room for the market to appreciate from here before we reach nosebleed territory. With every upside stab, though, the risk of a serious reversal increases. To preserve our wealth and keep it growing, we need to focus on value more intently than ever.
Fortunately, even in a market nearly devoid of bargains, I’m still spotting a few. Today, electric utility Exelon (NYSE: EXC) announced a takeover bid for Constellation Energy (NYSE: CEG), parent of Baltimore Gas & Electric.
The pricing for this dividend stock looks reasonable at only about 6.5 times cash flow (enterprise value to EBITDA). I generally consider any price tag below 7.5 times to be acceptable (from the acquirer’s standpoint) for an electric utility.
Moreover, Baltimore G&E’s large retail distribution business will help lower the percentage of EXC’s earnings derived from the more volatile wholesale generating business (sales of electricity to other utilities).
I’m pleased enough with the deal to reinstate my “buy” rating on EXC. I had previously moved EXC to a “hold” in the wake of the Fukushima disaster, but it now appears that Japan’s nuke woes will have only a limited impact on the U.S. nuclear industry.
Pay up to $43 for this dividend stock, which currently yields 5% (and the Constellation merger will likely bolster the safety of the dividend).