Constellation Energy Touts Strong Fundamentals: Analyst Forecasts Special Dividend

Mizuho analyst Anthony Crowdell reiterated a Neutral rating on Constellation Energy Corporation CEG, raising the price target to $116 from $106 on higher merchant multiples.

Strong fundamentals at Constellation will present an opportunity to return capital to shareholders, Crowdell said.

Constellation trades at a 5% 2025E FCF yield. The company has stable fundamentals over the next few years supported by the latest commodity forwards and government subsidies, he added.

Constellation currently awaits IRS guidance for tax credits around pink hydrogen. 

Crowdell thinks that should this process be further prolonged, management likely tables their hydrogen projects and returns capital to shareholders.

According to the analyst, as project timelines get delayed, cash drag becomes more paramount. 

Crowdell believes the company plays it safe under this scenario and either increases share repurchases ($1 billion currently) or issues a special dividend, with the former being more likely. 

Since Constellation's IPO last year, natural gas curves have largely been backwardated, the analyst notes. As physical storage begins to ramp up heading into what meteorologists perceive to be a colder-than-normal winter season, natural gas prices have increased. 

This, combined with the heightened LNG demand in European nations and recent geopolitical events, has pushed commodity forwards into contango. This is relevant because as natural gas prices increase, this translates into higher power prices, generally.

Constellation offers an area of relative safety in a group that has faced significant selling pressure in recent weeks but believes that this is already reflected in the current 84% premium valuation to the sparse IPP comp set, the analyst explained.

Price Action: CEG shares are trading lower by 0.92% to $114.66 on the last check Friday.