Is Consolidated Edison A Good Stock To Buy?

Aug.15.14 | About: Consolidated Edison (ED)

Summary

Consolidated Edison has increased its dividends for 40 consecutive years, and has a dividend yield of 4.4% and a payout ratio of 59%.

Consolidated Edison has the lowest P/E ratio and the highest forward dividend yield among the major companies in the diversified utilities industry.

Consolidated Edison has secured its rates of electricity for the coming two years, and gas & steam for the coming three years by an agreement with public authorities.

With the positive outlook of the electric market in New York City and the secured rates, this company has a strong position..

Instead of buying 10-year treasury bills, which yield 2.48%, investors achieve higher earnings with this stock.

According to a paper by S&P Dow Jones indices, dividends have constituted one-third of the total equity returns since 1926. The other two-thirds of the contribution came from capital gains. We prefer dividend stocks over treasury bonds because dividend stocks deliver better yields and will probably appreciate in value over the long term. Dividend Aristocrats are a good starting point to build a strong income portfolio. The stocks, which are constituents of the S&P 500 Index, should have increased dividends in each year during the last 25 years to be included in the Dividend Aristocrat index. The main risk in the Dividend Aristocrats index is that some of the stocks have high payout ratios and are not likely to continue satisfying the requirements of the index in the future. However, we can minimize this risk by choosing the stocks that have low payout ratios. These stocks have a proven track record of increasing dividends in the past. They also have the capacity to continue increasing their dividends because of their low payout ratios.

Consolidated Edison (NYSE:ED) is a good example of this. The company is one of the leading diversified utilities companies, and provides delivery of regulated electric, gas, and steam in the United States. It is a member of the S&P 500 Dividend Aristocrats; has increased its dividends for 40 consecutive years; and has a dividend yield of 4.4% and a payout ratio of 59%. Consolidated Edison has increased its dividend by 1.0% annually during the last ten years.

As can be seen in the table below, Consolidated Edison has been continuously increasing its net income. The company increased net income from $537 million in 2004 to $1.1 billion in 2013. It is operating with a gross margin of 26.5% and a profit margin of 9.5%. Total liabilities constitute 72% of the company's total assets as of the end of the second quarter of 2014.

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Consolidated Edison has the lowest P/E ratio and the highest forward dividend yield among the major companies in the diversified utilities industry. Consolidated Edison's profit margin of 9.5% is higher than the industry's average profit margin of 6.7%.

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Consolidated Edison has secured its distribution rates to yield an ROE of 9.2% for electric and 9.3% for gas. On the other hand, the New York State Public Service Commission required the company to invest $1 billion to protect its system from meteorological risks and climate change, according to this agreement.

According to Consolidated Edison's statement dated May 19, 2014, the company makes a $2.5 billion annual investment to upgrade and maintain its infrastructure. The company expects 1.3% annual increase of electric peak demand and 3.3% annual increase of natural gas demand for the coming 5 years. The employment growth in New York City has beaten the growth in the U.S. by 3.4 percent since 2009. This will also help Consolidated Edison's success in the future.

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I believe that Consolidated Edison is good choice for income investors who like constantly growing dividend yields and are satisfied with the current dividend yield of 4.4%. Instead of buying 10-year treasury bills, which yield 2.48%, investors can achieve higher earnings with this stock.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.