In Part 24 of the 54 part Dividend Aristocrats In Focus series, I take a closer look at the competitive advantage and growth prospects of utility provider Consolidated Edison (ED, Financial). Consolidated Edison provides electricity to approximately 3.3 million customers in New York and gas to 1.1 million customers. The company has operated for over 180 years and has increased its dividend payments for 40 consecutive years. The company’s operations are analyzed in the section below.
Business overview
Consolidated Edison generates the bulk of its earnings and revenues by providing electricity and gas utility services on the East cCast through Consolidated Edison Company of New York (referred to as CECONY) and Orange & Rockland utility company (referred to as O&R). Together, O&R and CECONY make up the company’s utilities segment. In addition to these businesses, Consolidated Edison also operates a competitive energy business which participates in infrastructure projects, provides energy related products to wholesale and retail customers, and which sells electricity purchased on wholesale markets to retail customers.
Consolidated Edison projects that virtually all of its earnings will come from its utilities businesses over the next several years. The company operates in three segments. Full-year 2013 revenue for each segment is broken down to give you an idea of the size of each of the company’s operating segments:
- CECONY: 84.4% of 2013 revenues
- O&R: 6.7% of 2013 revenues
- Competitive Energy Business: 8.9% of 2013 revenues
As you can see above, the company’s utilities business generated over 91% of revenues in 2013. The competitive energy business contributed negative 23 million in net income over 2013; utilities accounted for all net income for the year.
Competitive advantage
Consolidated Edison’s utility business operates in a highly regulated industry. Competition is restricted by regulation and zoning of utility providers. In addition, maximum returns are dictated by government regulation, preventing price gouging from local monopolies created by government zoning. The image below shows Consolidated Edison’s territory in the State of New York:
Source: Power2Switch.com
The future earnings and competitive advantage of Consolidated Edison are closely tied to the company's relations with regulators. Consolidated Edison’s long history of serving New Yorkers and investment into infrastructure and alternative energy sources make it very likely the company will retain its territory for the foreseeable future.
Consolidated Edison sells electricity and natural gas to consumers. Its services are very unlikely to go “out of date;” the company is largely insulated from the competitive destruction that other portions of the economy experience. It is difficult to imagine a world where consumers and businesses no longer need electricity or natural gas. As a result, the company’s future earnings power is not in question.
Growth prospects
Utility businesses offer investors safety but have limited growth prospects. Consolidated Edison is no different. The company has grown revenue that has actually decreased since its peak in 2008. The company has seen earnings per share growth of about 1.6% per year over the last 15 years, about in line with inflation. Unfortunately for shareholders, Consolidated Edison has been a net issuer of shares. Share count has grown at about 1.5% a year over the last 15 years. Had the company not issued new shares, it could have doubled its long-term earnings per share growth rate.
Consolidated Edison expects gas usage to increase about 3.3% per year through 2018, and electricity usage to increase about 1.3% a year. Electricity is expected to grow slower than gas due to more efficient use of electricity. The company will likely keep its prices growing in line with inflation. As a result, shareholders of Consolidated Edison can expect lackluster growth in the low single digits.
Dividend analysis
Consolidated Edison has a strong dividend yield of 4.15%. The company currently has a payout ratio of about 65%, giving the company some room to increase dividends slightly faster than overall company growth. Consolidated Edison’s high dividend yield and extreme safety make it a good choice for investors seeking current income without much need for future growth.
Recession performance
As one would expect, people still need electricity and gas during recessions. These items are difficult to cut back on, especially during cold East Coast winters. Consolidated Edison performed well throughout the Great Recession of 2007 to 2009. The company’s earnings per share are shown below from just before the recession (2006) to after (2010).
- 2006 EPS of $2.95
- 2007 EPS of $3.48
- 2008 EPS of $3.36
- 2009 EPS of $3.14
- 2010 EPS of $3.47
The company performed well throughout the recession and increased its dividend payments each year as well. As stated earlier, Consolidated Edison is a solid choice for investors who can tolerate little risk but want strong current income from large dividend payments.
Valuation and final thoughts
Over the last decade, Consolidated Edison has traded at a discount to the S&P500’s PE ratio of about 0.85x. Based on the S&P 500’s current PE multiple Consolidated Edison should trade at a PE multiple of around 15. The company currently has a PE ratio of about 14. If the market were trading at its historical PE average of 15, the fair value for Consolidated Edison would be about 12.75. I believe the company is trading near fair value for elevated market values of today and above fair value on an absolute historical basis.
Consolidated Edison makes a solid investment for investors seeking current income with little need for growth. The company has the second-lowest standard deviations of any dividend aristocrat, with a 10 year price standard deviation of just 16.4%. Only Johnson & Johnson (JNJ, Financial) has a lower 10-year price standard deviation out of the dividend aristocrat index. Consolidated Edison is the 48th highest ranked stock out of 133 based on the 8 Rules of Dividend Investing due to its extremely low standard deviation and high dividend yield. The company’s tepid growth keeps it from ranking higher.
