Consolidated Edison (ED) is one of the nation's largest investor-owned energy companies. The company provides a wide range of energy-related products and services to its customers through regulated utility subsidiaries and competitive energy. It has an impressive dividend history, being one of the few dividend aristocrats within the S&P 500 index (SPY). Currently, it offers a dividend yield of 4.34%, which is slightly below the industry's average but is still quite attractive for income investors. Consolidated Edison has a market capitalization of about $16.5 billion, and is traded on the New York Stock Exchange.
Consolidated Edison, incorporated in New York State in 1997, is a holding company which owns all of the outstanding common stock of Consolidated Edison Company of New York [CECNY], Orange and Rockland Utilities [O&R] and the competitive energy businesses. NY's principal business operations are its regulated electric, gas and steam delivery businesses. O&R's principal business operations are its regulated electric and gas delivery businesses. The competitive energy businesses sell electricity to wholesale and retail customers, provide certain energy related services, and participate in energy infrastructure projects.
CECNY provides electricity to about 3.3 million customers and gas to approximately 1.1 million customers, being the company's largest. In the past year, it was responsible for more than 80% of Edison's revenues and about 90% of its net income. Therefore, since its primary businesses are regulated activities, Consolidated Edison does not face much competition in the markets it serves leading to a relatively stable operating environment over the long term. Moreover, while its competitive business unit obviously must compete in the market place, its relatively small effect on the company as a whole makes competition a negligible force on Consolidated Edison. Because the bulk of its operations are in New York, Consolidated Edison is primarily regulated by the New York Public Service Commission [NYPSC]. The regulator has allowed the company to earn about 9-10% return on equity [ROE], which is in line with the industry's average.
In 2012, the company's financial results were negatively affected by weather conditions namely by Superstorm Sandy, which affected Edison's entire service territory. Its revenues amounted to $12.2 billion, a decrease of 5.4% from the previous year. Going forward, the company expects to achieve only modest growth. For its electric-delivery business it forecasts demand growth of 1% annually over the next five years. However, for its gas business, which is much smaller, it expects strong growth, forecasting demand growth of 20% annually over the next five years. According to analysts' estimates, Consolidated Edison's revenues should increase by 3.2% in 2013 and 2.4% in 2014, which is not impressive growth but shows an improvement from the revenues declines of the past couple of years.
Regarding its profitability, the company's cost control has been very good over the past couple of years, leading to higher profitability levels despite falling revenues. Its EBITDA stood at $3.2 billion an increase of 2.6% from 2011, leading to an EBITDA margin of 26.3% up from 24.3% in the previous year. Its net income increased by 7.4% to $1.1 billion, or $3.86 earnings per share. During the first six months of 2013, Consolidated Edison has reported mixed financial results, with revenues up by 2.6% to $6 billion but net income decreased by 26% to $364 million due to higher costs and interest expenses.
Regarding its dividend history, Consolidated Edison has an impressive track record. The company has raised its dividend for 39 consecutive years, being therefore a 'dividend aristocrat'. It is the only utility (XLU) in the S&P 500 to raise its dividend for 25 or more consecutive years, and is currently the third-highest yielder within the S&P 500 dividend aristocrats, after AT&T (T) and HCP (HCP). In 2013, the company has increased its dividend per share [DPS] from $2.42 to $.46, a modest increase of 1.7%.
Its dividend payout ratio has been relatively stable over the past five years, in the range of 63% reported in 2012 to 75% in 2009. For a stable company like Consolidated Edison with a heavy weight of regulated activities this dividend payout ratio seems to be acceptable, and it is in line with most of its peers. Therefore, based on earnings the company has plenty of room to keep it dividend policy of growing dividends for the next few years, without putting into question its sustainability.
The company's cash flow generation is good, generating about $2.6 billion of cash flow from operations in the past year. This cash flow was almost enough to finance both its capital expenditures [capex] of $2.06 billion and $700 million in dividend payments, leading to a very small increase in its balance sheet leverage. For 2013, the company expects to spend about $2 billion in capital expenditures which will be financed through cash flow from operations and additional debt, and does not anticipate the need to issue equity. Its balance sheet is relatively strong given that its net-debt-to-EBITDA was 3x at the end of the second quarter of 2013, which is below the industry's average and could therefore increase slightly over the next few years supporting the company's dividend policy.
The major positive factor about Consolidated Edison is its impressive long-term dividend history, which provides investors a great certainty about management's commitment to the company's dividend policy. Although the business' growth should be limited, Consolidated Edison should be able to deliver a slightly growing dividend over the next few years due to its good cash flow generation capacity and strong balance sheet. Therefore, Consolidated Edison appears to be a safe bet for income investors to collect a predictable income stream for the foreseeable future.