Con Ed: Slow and Steady Wins the Dividend Race

Consolidated Edison, Inc. (ED), through its subsidiaries, provides electric, gas and steam utility services in the United States. It provides electric service to approximately 3.3 million customers and gas service to approximately 1.1 million customers in New York City and Westchester County, as well as steam service to office buildings, apartment houses and hospitals in parts of Manhattan. (Click chart to enlarge)

Consolidated Edison is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 35 consecutive years. For the past decade this dividend stock has delivered an annual average total return of 6.30 % to its shareholders.

At the same time, the company has managed to deliver a 0.80% average annual increase in its EPS since 1999. For the next two years analysts expect EPS to increase to $3.11 and $3.30, respectively. The main problem for utility companies is that they are very capital intensive and are highly regulated. In order for utility companies to increase rates, they have to seek regulatory approval. In addition to that, investing in projects such as the smart grid is subsidized through federal programs, although companies like Con Ed typically put in at least a portion of the needed amount.

The return on equity has declined slightly over the past decade, although it is at 10% currently.

Annual dividend payments have increased by an average of 1.00% annually over the past 10 years, which is higher than the growth in EPS. The company has increased the amount of the stock outstanding by an average of 2.6% per year over the past decade. Despite the slow dividend growth, the company might be a good pick for investors who are seeking current retirement income.

A 1% growth in dividends translates into the dividend payment doubling almost every 72 years. If we look at historical data, going as far back as 1975, we would see that Con Edison has actually managed to double its dividend payment every eleven years on average. The current dividend payment is double what it was in 1985 however.

Over the past decade, the dividend payout ratio has ranged between a low of 57% and a high of 97%. Currently the dividend payout ratio is at 69.6%. While this would be high for a company like McDonald’s (MCD) or Procter & Gamble (PG), a payout ratio of 70% is not uncommon for utilities. Utilities typically pay out a large portion of their earnings as dividends, which explains their slow dividend growth and high dividend yields. Most utilities operate as natural monopolies, which guarantee almost no competition in their specific geographic areas. It would be very costly to run two separate electrical grids, and such investment could take many decades to pay off. Thus utilities tend to generate stable earnings and revenues in any economic conditions, as people keep using water, gas and electricity in their daily lives no matter what.

I believe that Consolidated Edison is attractively valued with its low price/earnings multiple of 14, as well as an above average dividend yield at 5.60%. The high dividend payout should not be a concern because of the industry the company is in. Because of the slow dividend growth of the stock however, I would only invest in it for current income within the next decade. I do own ED mainly for diversification within the utility industry and for a current yield boost to my dividend income.

Disclosure: Long ED

Comments

[Gtarras]

what other utilities would you recommend? TIA.

2009 Nov 20 06:14 PM

[notsosmart]

wait till that con ed over 100 year infrastructure starts to fail.just like that exploding pipe last year.

2009 Nov 20 08:40 PM

[YoYoMama]

Yield is 5.63%, did not see that stated outright in this article.

2009 Nov 21 09:31 AM

[VOL FAN]

Jim Cramer just recommended this stock as one of five for high dividend yield. Better than money in the bank. This company will be around far longer than all of us and has continued to raise the dividends. Certainly better than 1% Cd's and you can get your money back at any time. Also I would think with the stimulus package just starting in New York and probably another one on the way Con Ed would also be considered a growth stock.

2009 Nov 21 11:26 AM

[jg1945]

Gtarras..You might want to check "GUT" it's an ETF run by Gabelli.
Pays 6 cents a share MONTHLY...based on Fridays close it yields 8.9%. Tough to beat that monthly compounding.

2009 Nov 21 02:24 PM

[jarco]

I too would be interested in the answer to your question.

Meanwhile, other than ED, I own and would recommend consideration of CNP and a number of more "conventional " Electric Utilities (e.g. D, DUK, XEL).

Both ED and CNP are primary distributors and therefore escaping the power generation risks. I recently sold SO and likely will reduce or eliminate DUK due to coal exposure.

For pure income, I prefer bonds over common stock and have positions in about 12 other utilities


On Nov 20 06:14 PM Gtarras wrote:

> what other utilities would you recommend? TIA.

2009 Nov 21 10:11 PM

[Michael Fitzsimmons]

yup, i sure like those ol ED dividend payouts. sure beats 0.01% in a money market account!

2009 Nov 23 03:34 PM

[Michael Fitzsimmons]

FPL is a good one, and will benefit from a sane carbon tax. that said, obama and chu believe in the myth of oxymoronic "clean coal" and have worked to skew the carbon credits toward the least deserving industry: coal based utilities. the world of doublespeak started under bush is still going strong with obama et all...

2009 Nov 23 03:57 PM

[Dividend Growth Investor]

Con Ed is the only utility that I own. Other "utility type" investments I own could include pipeline Kinder Morgan Partners (KMP) or (KMR).

Utilities are better suited for investors seeking current income. check this article for info what utilities I might consider for further research:
seekingalpha.com/artic...

2009 Nov 23 05:15 PM

[Ron fr Smithtown]

To me, ConEd is a long-term investment! Since I have owned it, it has been as low as $32. & as high as $46. but has consistantly paid out an average of 6.00 % dividend! Try & get that in any bank!
My dad worked for the company for 41 yrs before retirement & besides being a little stingy with salaries,in the old days, they always took care of their employees, even during the Great Depression, when other big firms were laying off! Basically, you can't go wrong in buying the stock!

2009 Dec 01 05:41 PM