What to do when a high dividend stock attempts a significant acquistion of another company.

Keep away from high dividend stocks that you don't understand.  I started analysis on Exelon (EXC) before several merger and acquistion proposals were reported in the financial press.  Now I know that I'm not going to be able to understand the dividend record, earning power, or strength of balance sheet of the combined companies.
I thought that Exelon Corp was shaping up to be an excellent high dividend stock when I discovered it a few weeks ago, but then they decided to buy Constellation Energy Group (CEG).  I know little to nothing about CEG, so now I'm a bit hesitant to spend much time analyzing Exelon.  This is unfortunate because I wanted to analyze Exelon so my readers would have some good analysis of a high dividend utility stock.
What really irks me is that they need the permission of third-party bureaucrats to acquire another company.  If the CEG merger wasn't enough – now they are attempting another acquisition only this time much smaller.  Again, they need bureaucratic permission.    EXC doesn't expect to be granted approval until the third quarter of 2011.  This is more proof that I don't live in a free, capitalist country.
The company that Exelon seeks to merge with is doing its own acquisitions.  All of this makes analysis of Exelon not worth the effort.
I'm taking Exelon off my watch list until all this merger and acquisition occurs.  I will reevaluate the new company once they start paying dividends.  Stay away from high dividend stocks that are attempting to acquire one or more companies if you don't clearly understand how the new company will make profits and their capitalization structure.  You might have to sell one of your high dividend stock favorites when they decide to propose an acquistion.  There have been many colossal acquisition blunders (e.g. Time Warner buying AOL).  Don't let a high dividend blind you to a horrible acquistion that will lose the company money.
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By Tess Stynes and Naureen S. Malik

Exelon Corp. (EXC) said Thursday it has agreed to purchase a north Texas natural-gas fired plant from Sequent Wolf Hollow LLC in a $305 million deal.

The move follows Exelon's planned $7.8 billion acquisition of Constellation Energy Group Inc. (CEG) that was unveiled last month. That deal puts Exelon–the largest operator of nuclear plants in the U.S.–in position to resuscitate some nuclear developments abandoned by Constellation because they were too costly.

When the deal between the two power companies was announced, executives said that matching Exelon's large merchant business, which sells electricity on the wholesale market, with Constellation's retail business, which markets directly to consumers, was a key driver for the deal.

Separately, Constellation on Thursday agreed to acquire MXenergy, a Connecticut supplier of natural gas and electricity, for $175 million. MXenergy has more than a half million customers in 15 states and two Canadian provinces. Constellation expects the move to supplement its growing retail business, especially in the residential market. MXenergy shareholders Denham Capital Management, Charterhouse Group LLC and Sempra Energy Trading LLC support the deal.

Exelon said the acquisition of the Texas plant will expand its clean-energy portfolio in anticipation of coming clean-air regulations. "This is not a needle mover," William Von Hoene, executive vice president of finance and legal at Exelon, said during the Deutsche Bank Securities alternative energy, utilities and power conference Thursday afternoon.

The Wolf Hollow acquisition is expected to close in the third quarter upon regulatory approval.

It also expands the company's presence in Texas, where Exelon already owns and operates three gas-fired plants and where Constellation also has generation assets. Hoene said Wolf Hollow "will be modestly accretive to cash flows in 2012 and neutral to earnings near-term."

Exelon last month reported first-quarter earnings fell 11% amid hedging losses and other charges, though revenue was up due to higher prices and unusually cold weather in Texas.

Shares of Exelon closed 1.1% higher at $42, while Constellation also advanced 1.1% to $37.07.

-By Naureen S. Malik and Tess Stynes, Dow Jones Newswires; 212-416-4210; naureen.malik@dowjones.com

Published in: on May 12, 2011 at 10:04 pm  Leave a Comment  

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