Should I Sell my First Energy (FE) Stock?

Oddly, this isn’t the first time this thought has popped in to my mind.  Last year I wrote a piece title “3 Reasons I Would Sell a Stock.”  The listing was created to help me identify holdings that have fallen out of favor in my portfolio or have not performed.  After elaborating on the 3 reasons I would sell, I reviewed my portfolio for any stocks that met the criteria.  Any takers on guessing which one of the stocks that was discussed in the article?  First Energy!  Shocker, right?  After one heck of a run by the stock that has brought me close to break even, I now find myself asking the question again.  Is it finally time to sell my stake in First Energy?

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First Energy (FE) has been a problem child for me from the beginning.  Unfortunately, it sometimes works out like that.   Historically, FE has been a stock that pays a high stagnent dividend yield.  It is an electric utility after all.  Despite the fact that the company’s recent dividend growth rate was non-existent, I was willing to overlook this fact due to the high yield (Which was above 5% at the if I recall).   First big mistake right there; I was caught chasing yield and boy did I learn the hard way.  months after I purchased the stock, FE slashed their quarterly dividend from $.55/share to $.36/share.  UGH!   That decrease caused a massive sell-off and my position turned red really fast.   Isn’t the phrase dividend cut becoming too common on this website?  Especially after what happened with KMI and  then BBL over the last few months?  Finally, after over two long, painful years, my position is at the break even point due to dividend re-investment and I have the opportunity to potentially re-coup my initial investment.

To determine if I should sell the stock, I want to be able to answer one simple question.  If I did not own a stake in the company and had extra capital lying around, would I purchase stock and initiate a position in First Energy?   If FE does not pass our stock screener and I would not purchase shares, then why on earth am I holding on to them?  Especially considering the fact that I own a small stake in another electric utility that happens to be one of our 5 foundation dividend stocks.   Outside of the fact that I am being really stubborn here and don’t want to realize a loss.   To answer this question, I decided to run FE through the Dividend Diplomats Dividend Stock Screener to see if FE would pass this daunting test.   Let’s see how FE performed.

  • Price to Earnings Ratio Below the S&P 500 –  Using FE’s forward EPS per TheStreet.com of $2.84, FE is currently trading at a forward PE multiple of 12.6X, which is well below the PE ratio of the S&P 500.  For comparison sake, ED is trading at a multiple of 18.71X.  So FE is trading at both a discount to the market and one of the major players in the industry.
  • Payout Ratio below 60% –  Using the forward EPS from the line above, FE’s payout ratio is 50% while ED has a payout ratio of 66%.  Again, FE passes our metric and shows a better figure than ED.
  • Paying an Increasing Dividend –  As I already mentioned earlier, FE cut their dividend to $.36/share per quarter in 2013 and has not increased their dividend since.  So this point represents a big negative as my stagnant dividend stream is losing purchasing power each year.   For comparison sake, ED is a Dividend Aristocrat and has a 5 year average dividend growth rate of 1.9%.  This really isn’t much better; however, at least their dividend is growing at a rate near inflation.
  • Dividend Yield –   This isn’t one of the metrics on our stock screener, but it is worth pointing out.  FE’s current dividend yield is about 4% while ED has a current yield of about 3.56%.
  • Debt to Equity Ratio –  Again, this metric is not a part of our initial stock screener.   I began focusing on the impact of debt on a company when my KMI dividend was slashed significantly.   However, I really should have began looking at a company’s debt burden when I purchased stock in First Energy.   Per finviz.com, FE has a Debt to Equity Ratio of 1.78X and ED has a Debt to Equity ratio of 1.09X.    I understand that debt is not always a necessarily a bad thing, but I am a little “debt averse” after my recent experiences.  So much so that I even created a Top 5 list to identify Dividend Aristocrats with low debt to equity ratios.   We all have flavors of the month and mine is currently LOW DEBT!

Now that I have run some numbers, let’s get back to my original question.  Would I purchase shares in First Energy today based on the information above.  The answer is…..no.   So why am I not logging into Capital One Investing now and selling my stock?  Where is my hesitation and why am I struggling to make a decision here?  What has me torn is that while the stock may not have passed all metrics in our screener, it didn’t fail all of the screeners.  In fact, when compared to another company in its industry, the company appears to be trading at a significant discount while sporting a higher dividend yield.  The fact the company is trading at a discount makes perfect sense to me when you consider some of the negative factors I mentioned above.   Is the dividend growth rate terrible? Yes.  Do they have a lot of debt?  Yes.  However, their payout ratio is well below our 60% threshold.  So the answer isn’t as clear as I was hoping it would be by the time I reached the end of this article.

So all of you, I am asking you for your help here.  You offered Lanny some great advice about his internet package this week and I have loved reading your responses as they have come in.  So I would love to get your take on my dilemma.  If you were me, would you sell your stake in First Energy?   If so, what other companies would you recommend?  I am thinking I would go the ultra safe route and purchase a foundation stock or one of the stocks on my “Always Buy” list with the proceeds.  Are there other utilities I should consider as well?   Please everyone, help me out here!

-Bert

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25 thoughts on “Should I Sell my First Energy (FE) Stock?

  1. Hey Bert. I would sell it. Reasons: Your gut is telling you that it is a mediocre company or you wouldn’t think of selling it right now or contemplating. So just follow through and replace it with a Higher Quality Company in which you would hold pretty much forever. I’d rather have ED anyday over FE. Just my 2 cents but there are lots of fairly valued High quality companies out there.
    Can’t wait to hear what you buy and Keep up the hustle my friend.
    Cheers.

    • Hustler! I appreciate the advice here. Its hard when your gut tears you one way and the metrics don’t quite support it. I’m still on the fence here, and the other responses I have been getting so far have been mixed. Some holds, some sells. I’m strongly considering replacing it, but I need to find the right high quality stock, with the right yield, at the right price. I’m not in a position where I need to make a move, thankfully. So I can be patient and wait for the perfect opportunity to strike. At least that’s my current thought as I scribe these responses.

      Thanks for the advice, much appreciated. It’s all a part of this crazy game that we play. Take care and have a great weekend!

      Bert

  2. Bert, I’ll probably keep it if its not too big a position. As they say, selling is not a good choice for DGI investors like us. I sold KMI and OKE last year but look at them, they have jumped more than 50%, so, I was better off keeping them. But, hindsight is 20/20. Good luck with your decision and look forward to seeing what you decide 🙂 Keep racing!

    • R2R,

      It is in the tier of my larger holdings in my portfolio aka holdings of at least $2k. That seems to be the average for my portfolio. So bottom line is that it is a large holding in my portfolio but not one that could sink my portfolio. As I said to Hustler, I am still really torn and the comments have been great. However, they are a mixture of sell and hold so I am back to square one haha Man. Luckily, I’m not facing the same situation as KMI and BBL here and I have time to make a decision. Hopefully the right decision presents itself and makes it a no brainer for me.

      Take care and I appreciate the advice. Have a great day!

      Bert

    • Thanks IH! Luckily unlike KMI and ARCP in the past I am not losing too much sleep over this situation. It was more of a “Hey I found a potential weakness that could be corrected” type investigation. The results of my search and the awesome comments from everyone have been a huge help here.

      Take care and thanks for stopping by!

      Bert

    • Charlie,

      I don’t have a conviction. That is another issue I didn’t really touch in the article….their current business situation. They are heavy in coal and are currently in a nasty battle with us customers in Ohio about a new price plan. Do I like their direction? That will take another article and a heck of a lot more research. Maybe I”ll find out there is a better electric utility out there once I begin pulling back the layers.

      Great thought and you gave me a lot to think about here. Very much appreciated Charlie. Take care and enjoy your Sunday.

      Bert

  3. If you keep it, I would not reinvest the dividends back into the company. Use those dividends and add them to another stock that sports a high dividend growth rate. AAPL comes to mind right now. Or sell it and sleep easier at night.

    ADD

    • ADD,

      Thanks for the advice. I haven’t really experimented with not DRIPing my dividends. What worries me is that I only receive just over $30 a quarter from them. So will I be able to put that extra capital to better use elsewhere with a trading fee of $6.95? It sucks, I know. IT is times like this where an app like Robinhood would be awesome since you can invest your capital fee free. However, there are other cons that would offset that pro. Anyway, enough rambling from me.

      One of my goals is to invest in a stock with an under 2% yield, so maybe I trade the income for the higher growth rate here. Again, the advice is much appreciated.

      Bert

      • $30 a quarter is roughly one share of OHI, CSX, T and I’m sure a few more. 4 shares per year add up. I realize the $7 fee is high, but instead of investing $1,500 for a trade, you now have $1,530 and possibly one additional share if buying one of the three stocks above. Don’t think of it as using $7 to buy $30 worth of stock. Think of it as enhancing your position size when making a bigger purchase.

        • ADD,

          Great follow up point. I’ve never really thought of it in that sense. honestly, I have always just thought that I don’t make enough in monthly income to turn off DRIP. But addiing it to current extra cash to make a larger investment is an interesting idea. I would never complain about adding another stake to my powerhouse ATT position. That is one of my favorite (and original) companies in my portfolio.

          Thanks for taking the time to share!

          Bert

  4. No advice here, have my own problems lol.
    Just a tale of my initial stock investment of $6000 in FE @ $15 in 1982 and an additional $1900 over the next 9 years. Always reinvesting dividends. Do not have to go to Disneyland when owning this stock with all the ups ($78.42 in’o8, couldn’t sell, cap gain was a killer I thought) and downs, ( $9.55 in ’04) but long story short now have 4,295 shares paying $6000 div/year. Compounds to about 9% over the 32 years. I suppose I COULD have done better but I know I have done WORSE on other purchases. The way I look at it there is not much more bad news available for FE and it is all priced in at this time.

    • Ray,

      You have been riding the FE train much longer than I have. I appreciate you sharing your tale. Historically FE has paid a great dividend and you highlight the pros of holding the company over the long term. In hindsight, would you ride the roller coaster again? Quick question, is that a 9% overall return or about a 9% average return? You are right, many investments returned much worse over the same time span. But after hearing your story, I am asking myself if this company is fit for me over the long term.

      Again, thank you so much for sharing your story. Have a great day.

      Bert

      • Gosh, you read and answer comments? Thanks for that.
        The 9% is APY. I Have this neat program to calculate it http://www.1728.org/compint.htm .
        To put it into clearer context it is the same as if I had bought a $7900 34 yr CD paying 9%/year compounding annually. That would give you about $148000 now and the current position is valued at about $152000. I live with the large swings, breaks up the monotony.lol
        I did not reduce the yield due to the taxes, I would guess they reduce it by about 1.25%/yr. @15% rate.

        Thanks

        RAY

        • Of course Ray. We try our best to make sure we address every comment that comes our way. You have taken the time to share your story and respond to my question, so I want to give you the respect and reply to your thoughts. Of course, this is a bad example since this is coming a week later and I was slammed at work this week.

          Thanks for clarifying for me. The 9% APY makes a huge difference for me. I was a little concerned when I thought you have only made 9% with dividends all of those years. I can only imagine what your YOC is. With a company like First Energy, I assume that the price won’t fluctuate wildly and my appreciation upside is limited. My main focus is on the income the company will produce and whether or not the price will drastically fall. One day I could happily live with a 9% APY considering the avreage return for long-term investments is closer to 8%.

          Again, thanks for taking the time to share and comment. Have a great weekend and hopefully we will see you by here more frequently.

          Bert

  5. I’m with the other who have said to listen to your gut and get out of something mediocre and into something more productive and that fits your profile a bit better. I did a little bit of portfolio cleanup myself recently – I gotta say, it feels good. I sleep better having an extra few thousand dollars in JNJ or HSY instead of having that capital in something that I’m hoping will recover and eventually pay off.

    • Thanks for the advice Matt! What did your cleanup entail? What positions did you liquidate and which did you purchase?

      I am getting pretty tired of waiting for some stocks to rebound. Nothing makes me happier than seeing a steady growth in PG, JNJ, T, PM, and so on, in my portfolio versus the wait and see attitude for a lot of my oil stocks recently. I’m trying to remind myself to keep focusing on getting the best quality out there and building the strongest portfolio that I can. The rest will take care of itself after that, right?

      Again, thanks for stopping by!

      Bert

  6. Bert,
    I agree with most of the above posters, but with a caveat. I would hold it for now, watching the price closely only to see if there is a price fluctuation. The goal would be to make a little extra green, then put that new cash in with some fresh capital to make a nice buy. Since this stock has punched you in the stomach, it is ok to wait during recovery to see if you can’t get some extra capital out of it. This is the only time and method I would think that a little timing the market is not so bad.
    Still selling it immediately seems like the course of action. Future growth is just so darn valuable.
    – Gremlin

    • Gremlin,

      Thanks for stopping by! I love the twist you put on all of this. I have done that before when selling a stock and took a little gamble hahaha. I would set the floor 5% below the current market value and keep on increasing it as the stock appreciated. Just a away to take a gamble but protect myself from too much downside.

      Selling has been the most popular response for sure and seems like it will be the most likely outcome. But I’m not making a move to make a move. As Lanny showed yesterday in his article, the market hasn’t exactly been providing us with opportunities left and right. So I’ll find the right move that makes the most sense and attack when ready. Time to refocus on building the strongest dividend growth portfolio, not just the one with the highest yield.

      Bert

  7. Hi Bert,
    FE hasn’t done so badly in the last 18 years – here’s a comparison with VDIGX, a dividend growth index. https://goo.gl/N13Qin It took the index 16 years to catch up with FE and your entry timing will give different individual returns, but of course that doesn’t say anything about the next 20 years.

    My take is that your metrics are telling you to hold (no clear sell signal) but that you desire a better growth / return so are looking to replace it. Perhaps future / expected growth should be more represented in your screener since that seems to be the criteria you’re questioning at the moment? E.g. Finviz.com shows FE’s projected 5-year EPS growth as -2.53% (of course they might be wrong). Or perhaps dividend growth is a much more important metric when considering to sell a stock compared to payout ratio.

    My only advice is just that if you do decide to sell then be very clear about the reasons why so that you’d apply the same criteria to other stocks in similar situations going forward. Your investing system should be supporting your decision and doing the heavy lifting; otherwise you risk undermining your strategy based on emotion.

    Best wishes with your decision!
    -DL

    • That’s a really cool metric tool haha Thanks for sharing it with me. My scope in analysis is short-term, so thanks for sharing the long term impact with me. I’m in this game for the long haul, so I want to avoid making a stupid long term mistake for a short term benefit. I’m not going to make a move for the sake of making a move here. But if the opportunity to purchase a stronger company presents itself and I need capital to fund the purchase, this is the first place I am going to look.

      Future earnings growth should play a role in our analysis as well. Dividend growth is more prominent, but we are always considering earnings growth. You can’t increase your dividend or continue to pay out a high amount of earnings if that number continues to shrink, right? FE is lagging in that category and the current fight they are in with us customers is not going to help that mark. It is getting nasty here in NEO.

      I appreciate your advice. I need to make sure I learn from this experience. What’s sad is I ignored two pieces of our metric on this purchase. FE has dismal dividend growth and their PE ratio was climbing. What’s the point of having a screener if you aren’t going to follow it? I am done with the days where I am willing to sacrifice one metric because of a gut feeling. If it doesn’t meet our screener, then it doesn’t have a place in my portfolio. Bottom line.

      Thanks for taking the time to write the comment. Very helpful. Have a great weekend!

      Bert

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