So far in 2012, investors’ embrace of higher-risk assets has weighed heavily on utility stocks — one of last year’s top sectors. Year-to-date through Monday, the Select Sector SPDR-Utilities ETF (NYSE:XLU) had produced a total return of  -1.85%, far below the 8.56% gain for the S&P 500 index and worst among the nine SPDR sector exchange-traded funds.

And within the beleaguered utilities sector, one of the most notable laggards has been Exelon (NYSE:EXC). The stock has returned  -7.70% year-to-date, making it one of the worst-performing U.S.-based utility stocks thus far in 2012. Does this mean Exelon, which sports a dividend yield of 5.4%, is worth another look?

The Trouble with Exelon

On Monday, Exelon jumped 2.3% behind its third-largest volume day of the past year. Unfortunately, gains like this have been few and far between for Exelon shareholders. Three major issues have been holding it back:

First, last March’s Fukishima reactor accident following Japan’s tsunami has weighed on stocks connected to the nuclear power industry. While EXC has returned -2.52% since the earthquake, well above the -25.80% return of the Market Vectors Uranium+Nuclear Energy ETF (NYSE:NLR), the stock has nonetheless seen its relative performance suffer given that two-thirds of its generating capacity came from nuclear power prior to its merger with Constellation Energy.

This merger, which closed on Monday after being in the works for nearly a year, is dilutive to existing shareholders and has, therefore, been another key factor hurting Exelon shares. Looking further out, the merger will probably be beneficial for Exelon in that it has created the largest independent power producer in the U.S.. According to the Associated Press, the Constellation purchase provides Exelon with a footprint that encompasses 47 states and 6.6 million customers. The website exelonconstellationmerger.com, established by the two companies, provides more details on the deal’s potential benefits.

Third, and most important, is that the falling price of natural gas has caused prices in the power auction market to plunge. Exelon’s earnings estimates have been gradually trending down as a result, and the company is on track for stagnant growth both this year and next. While 2011 EPS was $4.16, analysts are calling for $3.09 in 2012 and $3.08 in 2013.

Until natural gas recovers and the power market improves, Exelon’s earnings are likely to remain mired near these levels. And since much of its business is based on three-year contracts, an improvement in pricing won’t have an immediate impact on Exelon’s bottom line.

The Pros and Cons of Investing Now

The most important factor in Exelon’s favor is its 5.4% yield — well above the 3.9% yield on XLU or the 1.9% yield on the broader market, as represented by the SPDR S&P 500 ETF (NYSE:SPY). Notably, EXC is one of the few dividend plays that doesn’t require investors to pay a price that has appreciated substantially in the past half-year.

This dividend is also well covered, meaning that EXC’s status as one of the top 20 highest-yielding stocks in the S&P 500 remains safe. On the negative side, the company hasn’t boosted its payout since November, 2008. So, the stock is probably more likely to be hurt by rising interest rates than the typical utility.

Another positive for Exelon is that of the three causes of underperformance mentioned above, the impact of the first two is largely in the past, while the lower earnings outlook has already been factored into the stock price. From here, the primary risk factors are more likely to be external issues, such as a significant break in the broader market or additional downside in the price of natural gas, rather than stock-specific developments.

In terms of valuation, Exelon’s forward price-earnings ratio is in line with its peer group, and the discount in its trailing P/E relative to the long-term average is among the best. But on an absolute basis, 12.9x is still a steep price to pay in this market for a company with dicey near-term growth prospects.

The Bottom Line

The cost-benefit profile of investing in Exelon depends on your time frame. In the near term, the weak earnings outlook means the stock is unlikely to provide substantial upside absent a large rally in natural gas prices. On a longer-term basis, however, Exelon represents a compelling dividend play with limited downside and the potential for price appreciation once investors grow confident that earnings have finally troughed.