- Consolidated Edison is posting $1 billion less in revenues this year compared to 2014.
- Regulatory challenges, capital investment requirements, and a high debt load make significant growth unlikely for this venerable electric utility.
- The positive is that the starting dividend yield is 4.4% and has been growing for four decades, but the dividend increases have been minimal this past decade.
For someone who is looking to buy a stock that not only offers a rising dividend but also has a fast growth rate as well, Consolidated Edison (NYSE:ED) is not the stock for you. Over the past ten years, the electric utility has only raised its dividend by 1.0% annually, grown earnings by 2% annually, and improved cash flow by 2.5% annually.
In 1999, Consolidated Edison was generating $3.13 in profits on behalf of shareholders. Fast forward fifteen years later, and the company is only generating $3.80 for its owners. Without significant earnings growth, there can almost never be significant dividend growth (absent the rare situation in which you have a rapidly increasing dividend payout ratio that remains manageable), and Consolidated Edison's figures reflect this. The $2.14 annual dividend in 1999 has only grown to $2.52 here in 2014.
What's causing the long-term problems for Consolidated Edison? The company has had tremendous difficulty growing its revenues. In 2007, the electric utility generated $13.1 billion in revenues. Since then, the company's revenue figures have been see-sawing; up $400 million in 2008, down $500 million in 2009, up $300 million in 2010, down $400 million in 2011, and you get the idea. Over the past twelve months, Consolidated Edison has posted revenue figures of $12.38 billion, almost a billion dollars below the amount of revenue that it was generating in 2007.
And this isn't a situation like IBM where you have massive cash flow available to significantly reduce the share count to cover up long-term stagnating revenue, but rather, Consolidated is a company that typically pays out 60-70% of its profits as dividends in a given year and has no stock buyback program in place. In fact, the shares get slightly diluted over time. In 2007, Consolidated had 272 million shares outstanding, and now the company has 292 million shares outstanding. When you have an increasing share count and declining revenues, it is difficult to deliver profit growth to shareholders.
The other concern is that there have been significant fines and obstacles preventing Consolidated Edison from fully enjoying the perks of regulators allowing to achieve returns on equity of 9.2% for their electric divisions and 9.3% for their gas and steam divisions. That's because, as a condition of securing those returns, Consolidated Edison is now obliged to spend $700 million upgrading its facilities while also dealing with over $150 million in rate reductions that apply to 2014.
Not only does Consolidated Edison have to deal with paying for significant capital improvements as well as lowered rates, but it also carries a steep debt load that is typical for most utility companies. Consolidated carries $12.5 billion worth of total debt on its books, and has to make over $500 million worth of interest payments in service of that debt.
Lower rates, high debt, and significant capital expenditures explain why it is difficult for Consolidated Edison to experience meaningful earnings per share growth. For those reasons, the 1-3% annual growth that has characterized the past fifteen years seems likely to continue well into the future.
This is not to say that Consolidated Edison should be shorted, or does not belong in any investor accounts. Current investors receive a starting dividend yield of 4.40%, which is nice. The company has been increasing its dividend for four decades, and with a payout ratio that is now hovering around 65%, the company should be able to continue giving shareholders token dividend increases of 1-3%. For someone who needs current income now, and is satisfied that it trickles upward at a slow pace, Consolidated Edison could make sense as an investment for an income investor that only cares about stable current income and does not require a growth rate above inflation.
Instead, my purpose in writing this article is to note the likelihood that an investment in Consolidated Edison comes with a low ceiling. There's no rationale for this company to deliver 10-12% returns or something impressive like that going forward. Rather, it's a slow-moving electric utility that inches upward over time, but doesn't have a clear avenue to grow by a rate north of 3%. In all likelihood, investors that buy today will achieve 5-6% annual returns, with the 4.40% starting dividend supplying most of the total returns as investors can only rely on token increases from Consolidated Edison that are aimed primarily at keeping the forty-year dividend streak alive but does not do much in terms of overall wealth-building for shareholders.