Why Entergy’s 5% Dividend Yield Beckons: Old Nukes Don’t Die -- They Get Relicensed
Merchant power producer Entergy (ETR) operates a fleet of nuclear electricity plants second in size only to that of Exelon (EXC). Like Exelon, its low-cost nukes allowed it to generate huge profits when energy prices surged several years ago. And both companies’ once-fat profits are now coming under heavy pressure as depressed natural gas prices drive electricity prices lower. As investors have cooled on Entergy’s prospects, the stock has fallen and the company’s formerly darn-nice dividend yield has expanded to a pretty exceptional 5.13%.
Most companies’ shares don’t provide a dividend yield that high unless they’re facing troublesome issues. That’s certainly true of Entergy, which is not only getting socked by softer industry pricing, but faces regulatory hassles as its aging nuke plants – including such high-profile crown jewels as Indian Point near New York and the Vermont Yankee site in New England -- require relicensing in the next few years. The overhang of those licensing issues is holding down Entergy shares, but wasn’t affecting margins until the company recently recorded a hefty accounting write-down of the Vermont Yankee plant. That hit the latest quarter’s net.
It comes down to this: if Entergy’s nukes get relicensed as officials hope, there’s little reason to think the company’s finances won’t be adequate to at least maintain the current dividend payout. Nobody can tell how that process will play out, of course. But here’s something to think about: with coal-fired plants shutting down nationwide in response to a one-two punch from clean-air regulations and competition from cheap gas, some experts are worried U.S. generating capacity could be strained. Those fears may make Entergy’s regulatory path a bit easier. If that scenario plays out, the stock will be a plum for income investors.
Of course, all of us yield junkies need to remember that we’re not just buying the dividend -- we’re also buying the underlying stock. It always makes sense to check out a company’s fundamentals, which you can do on YCharts – and to read the 10-K before deciding how to proceed.
Filed under: Company Analysis