Value Investing

Dividend Aristocrats Part 24 Of 52: Consolidated Edison, Inc. (ED)

Dividend Aristocrats Part 24 Of 52: Consolidated Edison, Inc. (ED) by Ben Reynolds, Sure Dividend

Aesop was born into slavery in Greece around 620 BC.  His tremendous intelligence did more than earn him his freedom.  He rose to become a respected advisor to kings and city-states.

One of Aesop’s most famous fables is the tortoise and the hare.  An arrogant, speedy hare brags to a plodding turtle about how fast he is.  The plodding turtle challenges Aesop to a race.  The hare took a commanding lead and looks back, feeling confident that he will win the race.  The hare decides to take a ‘power nap’.  The slow and steady turtle passes the hare and wins the race.

The moral of Aesop’s fable:  slow and steady wins the race.

Aesop’s story of the tortoise and the hare reminds me of Consolidated Edison (ED).

Consolidated Edison’s History

Consolidated Edison can trace its history back to 1823 – nearly 200 years ago.  Back then, the company was known as New York Gas Light Company.

In 1884, representatives of several gas light utilities throughout New York came together and consolidated their respective companies into a new business – the Consolidated Gas Company of New York.  The company continued to grow and acquire gas, electric, and steam companies serving New York City and Westchester County.  In 1936, the company changed its name to Consolidated Edison.

Consolidated Edison has paid increasing dividends for 41 consecutive years.  The company is the only utility in the S&P 500 with 30+ years of increasing dividends.  Consolidated Edison’s dividend growth over the last 41 years is shown below:

Consolidated Edison

Source:  Data from Yahoo! Finance

Consolidated Edison Business Overview

Consolidated Edison is primarily a regulated utilities business.  The company has generated 89% of its revenue from its regulated utilities business segments through the first 9 months of fiscal 2015.

Dividend Aristocrats Part 24 Of 52: Consolidated Edison, Inc. (ED)

Source:  2015 EEI Conference Presentation, slide 25

The company operates in 3 segments:

  • CECONY
  • O&R
  • Competitive Energy Business

CECONY stands for Consolidated Edison Company Of New York.  O&R stands for Orange & Rockland.  Together, these two segments make up Consolidated Edison’s regulated utilities business.

The company’s Competitive Energy Business segment which participates in infrastructure projects, provides energy related products to wholesale and retail customers, and sells electricity purchased on wholesale markets to retail customers.

Low Stock Price Standard Deviation & High Yield

Investing in ‘turtles’ is not right for everyone.  If you are looking for a high dividend yield, safety, and inflation matching (or beating) growth, then Consolidated Edison is a suitable investment.

The company’s stock is currently offering investors a high dividend yield of 4.2%.  For comparison, the 20 year U.S. Treasury Bond ETF (TLT) is offering investors a yield of just 2.6%.

Unlike a bond, Consolidated Edison’s dividend payments are growing (albeit slowly).  The company has managed dividend growth of 1.4% a year over the last decade.  This is about in line with inflation over the same period.  The company should grow its dividend payments faster over the next decade (more on that in the future growth section of this article).

Consolidated Edison has a 10 year stock price standard deviation of just 16.7%; the second lowest of any large cap dividend stock with 25+ years of dividend payments [for reference, Johnson & Johnson (JNJ) has the lowest].

You may be wondering…  Why does stock price standard deviation matter?  There are two answers.

First, lower stock price standard deviation means a less ‘bouncy’ ride on your way to total returns.  Lower dips make Consolidated Edison stock easier to hold as compared to more volatile stocks.

Second, stocks with low stock price standard deviations have historically outperformed the market.  That’s why low stock price standard deviation is one of the ranking metrics used in The 8 Rules of Dividend Investing.

The image below shows the relative outperformance of the S&P Low Volatility Index over the last decade.  The S&P 500 Low Volatility Index is comprised of the 100 lowest volatility stocks in the S&P 500 index.

Consolidated Edison

Source:  S&P 500 Low Volatility Index Factsheet

Consolidated Edison’s Future Growth Potential & Total Returns

Consolidated Edison grew its earnings-per-share at 3.4% a year over the last decade.  Earnings grew around 5%, but the company partially financed itself through share issuances, which dilutes earnings-per-share.  In total, the company’s share count has grown at around 1.4% a year over the last decade.

Going forward, I Consolidated Edison is expected to grow its earnings-per-share at around 3.5% a year.  This number is very close to its 3.4% 10 year historical compound earnings-per-share growth rate.

Consolidated Edison’s management is targeting a 60% to 70% dividend payout ratio.  The company currently has a 68.8% dividend payout ratio; on the high end of management’s range.  As a result, I believe that the company’s dividend payments will increase at either the same rate as earnings-per-share growth for the company, or slightly slower.

Investors in Consolidated Edison should expect total returns of around 7.5% a year from the company’s stock.  Returns will come from earnings-per-share growth of around 3.5% a year and dividends of ~4% a year.

Consolidated Edison stock has a payback period of 16 years using an assumed growth rate of 3.5% and the company’s current share price and dividend.  Click here to download a free Excel dividend payback period calculator (it’s near the end of the linked article).

More Safety:  Invest In What You Understand

Consolidated Edison is an easy to understand stock.  The company makes the vast majority of its profits selling electric and gas utility services to both business and residential customers on the East Coast.

Other investors have taken notice of Consolidated Edison’s durable geography based competitive advantage.  Here’s what Lanny at Dividend Diplomats had to say about the Consolidated Edison:

“I understand utilities, I know how they physically work and I know what benefit and value it provides: Providing energy to fuel the day-to-day of operations.  Let’s think big businesses, industries, etc., all the way to our entertainment platforms and this stems into our very own households.  The need is and for now – will always be there, therefore, this is a very used product that will always be used.”

It is very, very likely that Consolidated Edison will be around for a long time in the future.  The company operates in a highly regulated industry that creates natural local monopolies.  Moreover, the company operates a business that we all use every day (though not necessarily from Consolidated Edison, depending on where you live) – electricity and gas utility services.

Peter Lynch is one of the most successful institutional investors of all time.  Here’s what he has to say about investing in what you know:

Consolidated Edison

Final Thoughts:  Who Should Buy Consolidated Edison

Consolidated Edison stock is not for everyone.  The company has a passable-but-not-great expected total return of 7.5%.  As a utility, Consolidated Edison does not have rapid, or even average, growth potential.

The company’s high dividend yield and high levels of safety (both qualitatively and quantitatively) make it an ideal choice for risk-averse investors looking for high yielding investments that will pay inflation adjusted (or better) dividend payments.

Consolidated Edison is the prototypical tortoise investment.  Slow and steady dividend growth wins the race.