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Summary

  • Consolidated Edison (NYSE:ED) has a long history of dividend increases, a high dividend yield, and a reliable cash-generating business.
  • Revenue growth has averaged 6% pear year over these past five years but under 4% over the past decade.
  • Earnings growth and cash flow growth have averaged 9% and 13%, per year, respectively, over these past five years. But this is not an accurate view of the growth of the company, as earnings and cash flow have been somewhat irregular. In addition, with shares being issued, EPS has grown at a slower pace.
  • The dividend yield is currently 5% with a 70% payout ratio, and the dividend growth is approximately 1% per year on average.
  • Overall, this might be a useful stock choice for those desiring current dividend income.

Overview

Consolidated Edison traces its founding back to 1823. This large utility company serves New York, including New York City, and some parts of northern New Jersey and Pennsylvania with electricity, gas, and steam. It also provides energy capacity and risk management services.

Revenue, Earnings, Cash Flow, and Margins

Consolidated Edison has slow business growth.

Revenue Growth

Year Revenue
2009 $13.032 billion
2008 $13.583 billion
2007 $13.120 billion
2006 $12.137 billion
2005 $11.641 billion
2004 $9.758 billion

Consolidated Edison has grown revenue by an average of 6% annually over the past five years. This is a bit misleading, however, as the company’s growth has been much slower when a longer time period is taken into account. Operating Revenue in 2000 was about $9.3 billion, meaning that the 9-year revenue growth rate has been under 4% on average.

EarningsGrowth

Year Earnings
2009 $868 million
2008 $922 million
2007 $925 million
2006 $738 million
2005 $732 million
2004 $549 million

Consolidated Edison has grown operating income by over 9% annually on average over the past five years. Again, keep in mind that long-term growth is significantly lower than this.

EPS growth has been moderately slower because the company has been issuing shares without repurchasing shares.

Cash Flow Growth

Year Cash Flow
2009 $762 million
2008 $221 million
2007 $775 million
2006 $477 million
2005 $369 million
2004 $412 million

Cash flow growth between 2004 and 2009 has grown by an average of 13% annually. Again, this should not be assumed to be the actual long-term growth rate.

Profit Margin

Consolidated Edison has a profit margin of 7%.

Dividends

Consolidated Edison has a fairly high dividend yield of 5.00%. It’s also a dividend aristocrat, meaning it has raised its dividend for over 25 consecutive years.

Dividend Growth

Year Dividend Yield
2009 $2.36 5.60%
2008 $2.34 5.60%
2007 $2.32 5.10%
2006 $2.30 5.00%
2005 $2.28 5.00%
2004 $2.26 5.20%

Dividend growth during this five-year period averaged less than 1% annually, which more accurately reflects their real growth rate.

The payout ratio is currently about 70%, which is reasonable for a utility company.

Balance Sheet

Consolidated Edison has a typical balance sheet for a utility company with a Total Debt/Equity ratio of 1.00. Utility companies are very capital intensive and require huge capital investments for projects. This is more debt than most dividend companies that I analyze have, but it is balanced out by the fairly safe and reliable income streams that utilities regularly pull in.

Investment Thesis

Consolidated Edison may be a good investment choice for those seeking current dividend income. It’s reliable, has a high dividend yield, but slow dividend growth. That being said, ED may even be a good investment choice, period. If you look at the 10-year return of the S&P 500 over the past decade, you’ll see that it’s close to zero. On the other hand, over these 10 years ED has supplied investors with a roughly 5% dividend yield and roughly 3% annual stock price appreciation. This may be a bit unfair for a comparison, as it has been an historically bad decade for the S&P 500 index, but it at least shows that having some diversification can be a huge boon for a dividend portfolio.

A stock like this kind of exaggerates the benefits of investing in dividend paying companies. Dividend-paying companies are more reliable value-builders than their non-dividend paying counterparts, but for those with fairly high yields, growth may be a bit on the slow side. So for people who are not near retirement age, dividend paying companies with moderate yields are likely the best choice, but some yield diversification can be useful.

Risks

Like any company, Consolidated Edison faces risk. Utility companies are typically safe investments, but ED always faces risk of energy prices and is affected by the overall energy usage of New York, which is out of their control. Recessions result in lower energy usage, which in turn results in lower revenues for utility companies.

Conclusion and Valuation

Overall, Consolidated Edison seems to be a reasonable stock pick, with slow growth but a high dividend yield and a reasonable payout ratio. The P/E is about 14.5, which is fairly typical for a utility company, though perhaps not quite as low as I would like. It might not be the best stock pick for growth, but it may make a fairly nice stock pick for those planning on retiring in the next several years or those who wish to currently spend dividend income.

Disclosure: I do not have any positions in ED at the time of this writing.

Source: Consolidated Edison: Dividend Stock Analysis for 2010