A Look at Utilities: Con Edison vs. Aqua America

Includes: ED, SO, WTR
by: New Low Observer
Recently, a reader mentioned a strong interest in utility stocks. In particular, the prospects of Consolidated Edison (NYSE:ED) as an investment choice. The following are my thoughts:
For an apples-to-apples comparison, I would probably consider Southern Company (SO) instead of ED. Southern is "only" 19% above its low compared with ED at 30% above its low. Maybe the market affords a greater premium to ED which would explain the run-up in price.

However, I have done a back-of-the-envelope, apples-to-oranges comparison of ED and my most recent "utility" research recommendation of AquaAmerica (NYSE:WTR). Although there is strong interest in the regulated electric utilities, I feel that ED may not be as compelling at this time, as Aqua America (WTR), a regulated water utility. The following are some of the reasons why:
  • WTR is within 5% of the new low while ED is within 30% of the new low.
  • Although the Dividend4Life article on ED (written on July 21, 2008) has a fair value of $45.15, the percentage increase if the stock were to go to fair value would be a little over 6.39% (the Valueline fair value is $46). Interestingly, after July '08 the stock peaked at $46 in September 2008. Subsequently, ED fell to a low of $32.56 in March of 2009.
  • This contrasts with the Valueline fair value, for WTR at $19.29. This implies a potential increase of 19.98%. With a dividend of 3.6% and potential increase of 19.98%, you have a 23.58% return to look forward to. ED, on the other hand, provides a combined potential return of 11.99%. Because we cannot expect either stock to accomplish fair value, the best we can do is take the one with the most potential.
  • The Valueline multiple for the historical mean price for WTR has increased 18% (1.35 to 1.60) since 1997 while the multiple for ED has decreased by 30% (1.21 to 0.85) over the same period of time. This means that ED's mean price has not managed to increase overall as time has passed. WTR has managed to gain shareholder interest as time has passed.
  • IQTrends.com says that WTR is undervalued when it is yielding 4.4%. This means that the downside risk is to the $13.18 level, a decrease from the current price of 18.09%. For ED, IQTrends says the stock is undervalued at 7.5%. This would mean that ED would have to fall to $31.47, a decline of 25.85%.
  • WTR has a S&P rating of A while ED has a S&P rating of B+.

Obviously, there is no telling which of the two will perform better. Additionally, both companies are in regulated industries. If WTR isn't 100% regulated now it will become more regulated at the prospect of water's depletion. The nice thing about water is that it is constantly being renewed on location, although sometimes to a lesser extent. For an electric utility like ED, the ability to access coal, oil, and nuclear power is more restricted every day.

Since both companies are huge borrowers, I am concerned about the impact of a sudden interest rate hikes. Such an interest rate increase would crush both companies regardless of the qualitative element described above.

If the high yield of ED is the primary concern then, without a doubt, I would buy Con Ed. However, if the goal is high yield with an equal payout ratio and the potential for capital appreciation then, WTR is a better purchase at this time. ED will definitely be on my radar as the price comes down.

Author's Disclosure: Long WTR

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