Which Dividend Stock Has Too Much Debt?
Jun 28th 2013 10:43PM
Updated Jun 28th 2013 10:44PM
Companies need money to make money, and dividend stocks are no exception. Debt is an important and useful financial tool, but some corporations might be biting off more than they can chew. Let's take a look at where 5 dividend stocks currently stand on debt.
A kick in the assets
As a first measure of debt, we'll examine our dividend stocks' debt-to-total assets ratio. This is a first stab at feeling out a corporation's debt. While assets don't tell the whole story of a corporation's financial situation, they offer investors the rawest, cleanest look into a stock's financial situation.
At first glance, the differences in debt are astonishing. Without even adding in liabilities, Atlantic Power has taken out debt equivalent to 64% of its total assets. But given Atlantic Power's relatively small size (5% of Exelon's assets ), relatively recent creation (2004 ), and "growth by acquisition" model, we can expect as much from this stock.
While other dividend stocks' debt-to-asset levels have remained relatively steady, FirstEnergy's debt-to-assets mushroomed from 10%, to 40%, in one year. In its last quarterly earnings call, the utility addressed debt specifically, noting that it will be a serious focus for 2013.
Assets provide a top-line picture, but equity gets to the meat of the matter. Adding in liabilities to our equation, a dividend stock's debt-to-equity ratio shows investors how much wiggle room a corporation really has.
At the moment, Atlantic still comes out on top, with a 226% ratio. And while its 95% debt growth pales in comparison to FirstEnergy's 646% increase over the past two years, it's something investors should keep an eye on.
PPL's and Entergy's debt-to-equity ratios have also crept up 13.4% and 2.9%, respectively. Also, the two utilities have more debt (around 50% more) than equity, while Exelon sneaks underneath with a 93% ratio.
PPL's debt shouldn't be a major worry, as the utility has had some of the best success around with regulatory rate increase approvals. These approvals will increase margins in the future, pushing down the difference between debt and equity. The same can't be said for Duke Energy's recent rate increase rejection, cut nearly in half by North Carolina regulators. With a new CEO at the reins, investors can hope that the Carolinas will give Duke a fresh start from a recent rocky past.
In Entergy's latest quarterly report, "increased interest expenses and other charges" are expected to knock $0.10 off its $4.96 2013 EPS. The report states that it continues to pay out more interest as a result of more debt, and a simulated stress test found that a 1% interest rate rise on $1 billion of debt would knock $0.03 off annual EPS.
At the bottom of the bunch for both assets and equity, Exelon's debt is darling in the eye of the investor. With a 55% reliance on slow and steady nuclear power, this dividend stock can churn out electricity from capital projects it completed decades ago. And, while cheap natural gas has recently caused Exelon's stock to plummet, rising prices could put nuclear back in action.
Dealing with debt
It's no surprise that several dividend stocks have exceedingly high debt. It takes money to make money, and interest rates are at record lows. But overspending today could spell trouble for tomorrow, and investors need to watch their investments' debt levels closely.
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The article Which Dividend Stock Has Too Much Debt? originally appeared on Fool.com.Fool contributor Justin Loiseau has no position in any stocks mentioned, but he does use electricity. You can follow him on Twitter, @TMFJLo, and on Motley Fool CAPS, @TMFJLo. The Motley Fool recommends Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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