- Consolidated Edison is trading at a discount compared to most Dividend Aristocrats on several key metrics.
- Consolidated Edison provides electricity to approximately 3.7 million customers, gas to approximately 1.2 million customers and steam to approximately 1,700 customers.
- Consolidated Edison owns and operates the largest steam distribution system in the United States.
With approximately $12 billion in annual revenues and $41 billion in assets, Consolidated Edison, Inc. (NYSE:ED) is one of the nation's largest investor-owned energy companies. According to the company's website, "Consolidated 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."
To be clear, when an investor purchases shares of ED, they are acquiring ownership of a holding company which wholly-owns Consolidated Edison Company of New York, Inc., Orange and Rockland Utilities, Inc. and a handful of additional energy businesses that sell retail customers electricity purchased in wholesale markets, participate in hedging transactions, provide energy-related products and services to wholesale and retail customers and participate in energy infrastructure projects.
In aggregate, ED subsidiaries approximately provide electricity to 3.7 million customers, gas to 1.2 million customers and steam to 1,700 customers (which is the largest steam distribution system in the United States).
WHAT I DON'T LIKE
One part of Consolidated Edison's business model that I do not like is the constant need to repair existing, and construct new, infrastructure. During Consolidated Edison's annual meeting held last week on May 19 it was noted that the company's aging New York infrastructure alone requires $10 billion of repair work. It is of the utmost importance that the company be able to continually work with regulators to establish rate plans that work for both customers and shareholders. So far so good for 2014 as the company has stated it expects to receive an increase of more than $40 million net income compared to 2013 as a result of new rate plans.
Another aspect of an investment in Consolidated Edison that makes me wary is the reality that the company operates in a region that is prone to natural and artificial disasters. The company shared during its annual meeting last week on May 19 that it is spending more than nearly $1 billion over the next four years to protect its infrastructure from natural disasters. Although Sandy has come and gone, more hurricanes will wreak havoc across Consolidated Edison's operating territory. And chances are such a hurricane will be in an August or September if "List of New York hurricanes" on Wikipedia is an accurate indicator. The company also spoke about investments in security to thwart man-made threats to the company's physical and technical systems, which are unfortunately necessary investments given the type, and location, of services offered. A utility in the middle of Nowhere, USA is unlikely to be the target of terrorism or hacking. However, Consolidated Edison operates in the city that doesn't sleep and is therefore a more likely target or victim.
Perhaps I am biased because I am a software engineer but I think a website says a lot about a company, much like the clothes a person wears and how they carry themselves when you first meet them. Would you rather go on a date with a well-groomed, nicely dressed person to a fancy restaurant or with someone who hasn't showered or brushed their teeth in a week? Call me extreme, but I think a company's website is its first impression of its brand to the world. Consolidated Edison's website says old and out-of-date.
Perhaps a dated website means a company's management is out of touch with a modern marketplace. Perhaps a neglected website signals cracks are beginning to form in the business itself. First impressions can carry so much weight in real life. However, I cannot let my personal bias cloud the more important factors that make Consolidated Edison a compelling investment. Besides, go check out Berkshire Hathaway's website… best. website. ever.
Even though the stock price is near its 52-week low, its current price is essentially the max the price has peaked at 3 times in the last 15 years (yes, within the last three years it has peaked around $64/share). That is to say an investment in Consolidated Edison at today's prices are the highest people have been willing to pay in the last 15 years! Yikes! I really do not like writing and re-reading this fact. It really makes me unhappy to think my seemingly great 52-week low price is someone else's 15-year high. Based on historical patterns I am quite confident that over the next two to three years Consolidated Edison's price per share will dip to somewhere around the mid to low $40's. Anyone buying Consolidated Edison for $45 a share will be getting a steal of a deal assuming the company's business is sound at that time.
WHAT I LIKE
Qualitatively I appreciate that Consolidated Edison operates a business that provides non-discretionary services/products. People heat and cool their homes and turn on their lights every day whether or not they can justify purchasing a latte every day or splurging on a vacation. What is even better is ED provides their services to residential and commercial customers that service not only millions of New York citizens but millions more New York tourists.
Quantitatively I appreciate the following about Consolidated Edison's stock:
- Dividend Yield;
- Percent Above 52-Week Low;
- Price-to-Earnings; and
I discussed at length the considerations an investor must make when faced with investing in a low yield, high growth dividend paying stock versus investing in a high yield, low growth dividend paying stock in 4 Opportunities Using Dividend Growth Rate And Yield On Cost. Consolidated Edison is a perfect example of a high yield, low growth dividend paying stock that investors with a shorter investment time horizon may be better suited to own.
ED is currently the third-highest yielding Dividend Aristocrat at 4.7%, behind only HCP, Inc. (NYSE:HCP) and AT&T, Inc. (NYSE:T) which each currently yield 5.2%. Although ED is a Dividend Aristocrat which has managed to increase its annual dividend for 40 consecutive years, the company has only managed to grow its dividend per share just over 1% compounded annually over the last 10 years. This means investors during the last decade have seen the value of their dividend DECREASE because it has grown slower than inflation!
If ED is unable to grow its dividend any faster than 1%, investors can reasonably expect to see the anticipated dividend per share of $2.52 in 2014 increase to only $2.69 by 2020, which is presented below in Table 1.
Table 1. Dividend per Share
Dividend per share
* Estimated based on 10-year CAGR of 1.1%
Percent Above 52-Week Low
With a pathetic dividend growth outlook, one thing Consolidated Edison's stock does have going for it is its price relative to other Dividend Aristocrats. Only four Dividend Aristocrats currently trade for less than 5% above their 52-week lows and ED is one of those. Brown-Forman Corporation (NYSE:BF.B) trades for less than 1%, Family Dollar Stores Inc. (NYSE:FDO) and Target Corp. (NYSE:TGT) for approximately 1.8% and ED is around 3.6%. My logic behind placing value on a Dividend Aristocrat being nearer its 52-week low rather than its 52-week high is that I would rather purchase a quality company for less, rather than more, money and I believe Dividend Aristocrats are a great starting point identifying quality companies. Unfortunately for BF.B, I still believe it is one of the 5 Dividend Aristocrats To Avoid Buying Right Now.
Table 2. The Four Dividend Aristocrats Trading Nearest To Their 52-Week Low
Percent Above 52-Week Low
Consolidated Edison is among the cheapest five Dividend Aristocrats when ranked by price-to-earnings at 12.9x. Only Aflac Inc. (NYSE:AFL) at 9.5x, AT&T, Inc. at 10.3x, The Chubb Corporation (NYSE:CB) at 11x and Chevron Corporation (NYSE:CVX) at 12x have a lower price-to-earnings ratio than ED at 12.9x. All but Aflac are the four Dividend Aristocrats I identified in 4 Dividend Aristocrats You Should Consider Buying.
Table 3. The Five Dividend Aristocrats With The Lowest Price-to-Earnings Ratio
ED is tied with Cincinnati Financial Corp. (NASDAQ:CINF) for the lowest price-to-book ratio of all Dividend Aristocrats at 1.3x, though Archer Daniels Midland Company (NYSE:ADM) and Chevron Corporation are not too far behind as they currently trade at 1.4x book value.
Table 4. The Four Dividend Aristocrats With The Lowest Price-to-Book Ratio
As Kevin O'Leary often says in one form or another on Shark Tank, "Here's how I think of my money - as soldiers - I send them out to war everyday. I want them to take prisoners and come home, so there's more of them."
I think of my money similarly, which is why despite as much as I want to love Consolidated Edison as an investment I cannot bring myself to invest at today's price. Warren Buffett once said, "The stock market is a no-called-strike game. You don't have to swing at everything--you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!'" I just cannot step up to the plate today and swing for the fences with Consolidated Edison.
I really do not like the fact that ED has been unable to increase its dividend by more than 1.1% compounded annually over the last ten years. Nor do I like the fact that despite trading just above its 52-week low that ED trades very near its all-time highs between late 1998 and today. I agree with the multiple research analysts that see Consolidated Edison's stock underperforming the market.
It is not unreasonable to assume that the market will see ED trade near or below $45 over the next two years, and at that time, I may very well be a buyer, but not today. During the mid-2000's ED stock regularly traded between an approximate dividend yield of 4.5% to 6.5%. Assuming ED continues its measly dividend increases through 2020 to eventually pay a dividend per share of $2.69, and trades for somewhere between 4.5% to 6.5%, the stock price would trade for between $41.38 and $59.78, which is at best an increase of $5 per share over 6 years (which isn't good at all) and at worst a loss of nearly 25%! Ouch. But like I stated previously, I'm a potential buyer in the mid to low $40's.
Comment below if you think I'm overlooking something or share a similar opinion to my own.
Disclosure: I am long AFL, CINF, T, TGT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.