FirstEnergy stock (NYSE:FE) fell almost 30% today this morning before recovering later in trading on Wednesday. The company released three important pieces of news that has caused a lack of confidence in the stock, but the recent release had investors dumping at any price this morning.
The initial FirstEnergy news release was guidance about future operations of the utility, which is normal. The second was reaffirming investors that the dividend will be maintained at its current level (an important detail, so please keep reading).
The latest news releases, stated that: “This afternoon, FirstEnergy Corp. (NYSE: FE) received subpoenas in connection with the investigation surrounding Ohio House Bill 6. We are reviewing the details of the investigation and we intend to fully cooperate.” The stock continued to tank today as investors believed the company bribed at least one government official to help their company.
The possibly bribed bill relaxed renewable energy standards and offered what have been referred to as “bailouts” to a number of utilities, including FirstEnergy, which formerly owned two older nuclear power plants in the state. Some asserting that illicit payments may have gone as high as $60 million to push for the passage of the bill. An Ohio politician, Larry Householder has already been arrested.
This may seem like bad news for the utility and it is since the bill affects future cash flow of the utility. However, we have to be contrarian and understand a few fundamental truths. First the bill does not only favor FirstEnergy, but other companies. Second, it helps utility customers since they now don’t have to see their rates go up to pay for expensive renewables. Third, all regulated utilities (FirstEnergy exited the unregulated business) are heavily regulated and several government agencies are involved in passage of bills and approval of rate changes. The most important agency is the public utility commission, which goes through a utilities records consistently and are happy to disallow anything deemed not prudent for the benefit of the customer. With so many eyeballs on what a utility is doing and not doing, do you believe the bill was ultimately bad for the utility customer? The answer is no.
Obviously smart money bought the dip and understood that the utility is still a good utility by and large irrespective of a few bad actors. The actual risks may be uncertain, but it is essentially priced in for the most part for FirstEnergy and now is the time to jump in. This would be a great dividend play that clearly will continue to pay out.
