Consolidated Ed: Hold Onto This 4.08% Dividend Paying Stock

Aug.12.13 | About: Consolidated Edison (ED)

Over the past couple of months the Utility Sector (NYSEARCA:XLU) has been quite volatile. Some of the reasons for this uncharacteristic volatility have been the threat of rising interest rates, concerns over future CAPEX spending and some profit taking after a nice sector run. Having stated that, this recent volatility can provide some excellent opportunities, if you wish to invest or add to your investment in the utility sector. Consolidated Edison Inc. (NYSE:ED) is a utility company worth further investigation.

There are many advantages to adding utilities to your portfolio. Two main advantages include lower volatility and high dividends. So, if the market is getting unpredictable or "frothy," a well picked utility can add some stability to your portfolio while paying a solid dividend. As of August 11, 2013, this company with a market cap of $17.11 billion has a beta of 0.13 and a yield of 4.08%.

Consolidated Edison, Inc. is a holding company that provides a range of energy-related products and services to its customers through its five subsidiaries. The subsidiaries are Con Edison Company of New York, Con Edison Solutions, Con Edison Development, Con Edison Energy and Orange & Rockland Energies.

Con Edison Company of New York (Con Edison), a regulated utility, provides electric service in New York City (except for a small area of Queens), and most of Westchester County. The company provides natural gas service in Manhattan, the Bronx, and parts of Queens and Westchester. Con Edison also owns and operates the world's largest district steam system, providing steam service in most of Manhattan.

Con Edison Solutions is a leading energy services company that provides competitive power supply, renewable energy, sustainability services, and cost-effective energy solutions for commercial, industrial, residential, and government customers.

Con Edison Development develops, owns and operates renewable and energy infrastructure projects.

Con Edison Energy is an experienced power marketer and asset manager, providing customized energy-management services to a broad range of clients. The company is active in the New England, New York, PJM, ERCOT and California ISOs.

Orange & Rockland Energies serves a population of approximately 750,000 in seven counties in New York, northern New Jersey and northeastern Pennsylvania.

In the section below we will analyze aspects of Consolidated Edison's past performance. From this evaluation we will be able to see Consolidated Edison's profitability, debt and capital, and operating efficiency and free cash. Based on this information, we will look for strengths and weaknesses in the company's fundamentals. This should give us an understanding of how the company has fared over the past few years and will give us an idea of what to expect in the future.

Profitability

Profitability is a class of financial metrics used to assess a business's ability to generate earnings compared with expenses and other relevant costs incurred during a specific period of time. In this section, we will look at four tests of profitability. They are: net income, operating cash flow, return on assets, and quality of earnings. From these four metrics, we will establish if the company is making money and gauge the quality of the reported profits.

  • Net income 2011 = $1.003 billion
  • Net income 2012 = $1.062 billion
  • Net income 2013 = $1.141 billion
  • Net income 2013 TTM = $1.011 billion

Over the past couple of years Consolidated Edison's net profits have slightly increased. They have increased from $1.003 billion in 2011, to $1.011 billion in 2013 TTM. This represents a 0.8% increase.

  • Operating income 2011 = $2.120 billion
  • Operating income 2012 = $2.239 billion
  • Operating income 2013 = $2.339 billion
  • Operating income 2013 TTM = $2.215 billion

Operating income is the cash generated from the operations of a company, generally defined as revenue less all operating expenses, but calculated through a series of adjustments to net income.

Over the past three and a half years, the company's operating income has increased from $2.120 billion to $2.215 billion in 2013 TTM. This represents a small increase of 0.2%.

ROA - Return On Assets = Net Income/Total Assets

ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's net income by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment."

  • Net income growth

    • Net income 2011 = $1.003 billion
    • Net income 2012 = $1.062 billion
    • Net income 2013 = $1.141 billion
    • Net income 2013 TTM = $1.011 billion
  • Total asset growth

    • Total assets 2011 = $36.146 billion.
    • Total assets 2012 = $39.214 billion.
    • Total assets 2013 = $41.209 billion.
    • Total assets 2013 TTM = $41.922 billion.
  • ROA - Return on assets

    • Return on assets 2011 = 2.77%.
    • Return on assets 2012 = 2.71%
    • Return on assets 2013 = 2.77%.
    • Return on assets 2013 TTM = 2.41%

Over the past three and a half years, Con. Edison's ROA has decreased from 2.77% in 2011 to 2.41% in 2013 TTM. This indicates that the company is generating less income on its assets than it did in 2011.

Quality Of Earnings

Quality of Earnings is the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory. To ensure there are no artificial profits being processed, the operating cash flow must exceed the net income.

2011

  • Operating income 2011 = $2.120 billion
  • Net income 2011 = $1.003 billion

2012

  • Operating income 2012 = $2.239 billion
  • Net income 2012 = $1.062 billion

2013

  • Operating income 2013 = $2.339 billion
  • Net income 2013 = $1.141 billion

2013 TTM

  • Operating income 2013 TTM = $2.215 billion
  • Net income 2013 TTM = $1.011 billion

Over the past three and a half years, the operating income has been higher than the net income in all years. This indicates that Consolidated Edison is not artificially creating profits by accounting anomalies such as inflation of inventory.

Debt And Capital

The Debt and Capital section establishes if the company is sinking into debt or digging its way out. It will also determine if the company is growing organically or raising cash by selling off stock.

Total Liabilities To Total Assets, Or TL/A ratio

TL/A ratio is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt.

  • Total assets

    • Total assets 2011 = $36.146 billion.
    • Total assets 2012 = $39.214 billion.
    • Total assets 2013 = $41.209 billion.
    • Total assets 2013 TTM = $41.922 billion
    • Equals an increase of $5.776 billion
  • Total liabilities

    • Total liabilities 2011 = $24.872 billion.
    • Total liabilities 2012 = $27.565 billion.
    • Total liabilities 2013 = $29.340 billion.
    • Total liabilities 2013 TTM = $30.039 billion.
    • Equals an increase of $5.167 billion

Over the past three and a half years, Consolidated Edison's total assets have increased by $5.776 billion, while the total liabilities have increased by $5.167 billion. This indicates that the company's assets have increased more than the liabilities thus adding shareholder value.

Working Capital

Working Capital is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm's financial stability. It is also an index of technical solvency and an index of the strength of working capital.

Current Ratio = Current assets / Current liabilities

  • Current assets

    • Current assets 2011 = $3.507 billion.
    • Current assets 2012 = $3.638 billion.
    • Current assets 2013 = $3.451 billion.
    • Current assets 2013 TTM = $4.103 billion.
  • Current liabilities

    • Current liabilities 2011 = $2.366 billion
    • Current liabilities 2012 = $2.987 billion
    • Current liabilities 2013 = $3.945 billion
    • Current liabilities 2013 TTM = $4.504 billion
  • Current ratio 2011 = 1.48
  • Current ratio 2012 = 1.22
  • Current ratio 2013 = 0.87
  • Current ratio 2013 TTM = 0.91

Over the past three and a half years, Consolidated Edison's current ratio has been declining. It has fallen from 1.48 in 2011 to 0.91 in 2013 TTM. As the most recent current ratio is under 1, this indicates that Consolidated Edison would not be able to pay off its obligations if they came due at this point.

Operating Efficiency

Operating Efficiency is a market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. An operationally efficient market allows investors to make transactions that move the market further toward the overall goal of prudent capital allocation without being chiseled down by excessive frictional costs, which would reduce the risk/reward profile of the transaction.

Gross Margin: Gross Income/Sales

The Gross Profit Margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).

  • Gross margin 2011 = $7.593 billion / $13.325 billion = 56.98%.
  • Gross margin 2012 = $7.937 billion / $12.938 billion = 61.35%.
  • Gross margin 2013 = $8.301 billion / $12.188 billion = 68.11%.
  • Gross margin 2013 TTM = $8.328 billion / $12.342 billion = 67.48%.

Over the past three and a half years, Consolidated Edison's gross margin has increased. The ratio has increased from 56.98% in 2011 to 67.48% in 2013. As the margin has increased, this indicates that Consolidated Edison overall has increased its efficiency.

Asset Turnover

The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce revenue. The numerator of the asset turnover ratio formula shows revenue found on a company's income statement and the denominator shows total assets, which are found on a company's balance sheet. Total assets should be averaged over the period of time that is being evaluated.

  • Revenue growth

    • Revenue 2011 = $13.325 billion .
    • Revenue 2012 = $12.938 billion.
    • Revenue 2013 = $12.188 billion.
    • Revenue 2013 TTM = $12.342 billion.
    • Equals a decrease of 7.38%.
  • Total Asset growth

    • Total assets 2011 = $36.146 billion.
    • Total assets 2012 = $39.214 billion.
    • Total assets 2013 = $41.209 billion.
    • Total assets 2013 TTM = $41.922 billion
    • Equals an increase of 15.98%.

Over the past three and a half years the revenue growth has decreased by 7.38% while the assets have increased by 15.98%. This is an indication that the company from a percentage point of view has been generating less with more assets, effectively becoming less efficient at creating revenues.

Based on the information above we can see that Consolidated Edison has produced mixed results over the past three and a half years. Revenues have decreased by 7.38% but the gross margin has increased to 67.48%. This mix has resulted in earnings essentially remaining flat. Consolidated Edison's assets have increased more than liabilities thus increasing shareholder value while the company's ROA has decreased from 2.77% to 2.41%. Based on the results above we can see that the company has produced mixed results over the past three and a half years revealing essentially flat earnings.

Moving Forward

Consolidated Edison's long-range investment plan remains focused on keeping its systems reliable and safe for their customers. One of the biggest challenges moving forward will be the estimated $2 billion in annual CAPEX spending that will go toward replacing and upgrading the equipment of their electric, gas, and steam networks.

Like other utilities such as Southern Company (NYSE:SO) and Duke Energy (NYSE:DUK), Consolidated Edison is expecting gas conversions to become a much more significant part of their business. Lower natural gas prices combined with New York's deadline for phasing out the most polluting fuel oils have made a bullish case for city buildings to convert from oil to gas. As more buildings are converting to natural gas Con Edison is planning to invest more than $1.3 billion in their gas infrastructure in New York over the next three years.

Analysts' Estimates

Analysts at MSN Money are estimating an EPS for FY 2013 at $3.74 while the EPS is expected to improve into FY 2014 with an increase to $3.85.

Bloomberg Businessweek supports this idea as it expects the company's revenues to be around $12.6 billion for FY 2013 and increase to $13.1 billion for FY 2014.

Dividend

In 2011, Con Ed earned $3.59 per share and paid $2.40 per share. In 2012, Con Ed earned $3.88 per share and paid $2.42 per share, while in 2013 Con Ed has a full year estimated payout of $2.46 with an estimated earnings of $3.74 per share. In 2014, I would expect a modest increase in the dividend. Without a substantial growth in earnings, I would expect the 2014 payout to be $2.48 much like the increase in 2012.

Price Targets

  • Finviz has a price target for Consolidated Edison at $60.75
  • On April 17, Deutsche Bank gave the company a "Hold" rating with a target of $59.
  • While Argus gave Con Ed a "Buy" rating with a target of $60.

The above analysis reveals that Consolidated Edison is facing some challenges over the next couple of years. As the company is looking to spend over $2 billion annually on infrastructure this bodes well for the long term but will keep earnings at bay in the short term. Revenue projections have Consolidated Edison to be around $12.6 billion for FY 2013 and increase to $13.1 billion for FY 2014. As this is the case analysts are estimating that Consolidated Edison EPS for FY 2013 will be $3.74 while the EPS are expected to improve to $3.85 in FY 2014. Based on this information the company should be able to support a slight increase in the dividend in 2014. As earnings and revenues are expected to be quite flat over the next few years, this leads me to believe there will be many opportunities in the future to step in and invest on dips. The 4.08% yield looks sustainable over the next few years but based on the information above I do not expect much capital appreciation over the next couple of years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.