Edison International Leaves Dividend Investors Wanting

Aug.29.11 | About: Edison International (EIX)

Edison International (NYSE: EIX) is an electric utility serving central, coastal, and southern California with an estimated population of 13 million. EIX had about $12.4 billion in revenue in 2010. EIX has a market capitalization of $11.7 billion and an enterprise value of $25.1 billion, suggesting significant leverage.
EIX operates through three major subsidiaries:

  1. Southern California Edison Company (SCE), a California public utility
  2. Edison Mission Energy, a competitive power generator
  3. Edison Capital, an infrastructure finance company

SCE provides retail electricity to commercial, residential, agricultural, and industrial customers. SCE is regulated extensively through the California Public Utilities Commission. Edison Mission Energy develops, owns, operates and sells energy and capacity from independent power production facilities across the country. Edison Capital invests in infrastructure projects. SCE accounted for 83% of EIX net income in 2010; however, this amount was only 56% in 2008 but over 100% in 2009 due to losses in Edison Mission Energy. SCE represented $10.0 billion of the $12.4 billion of 2010 revenue. It should be noted that for financial purposes, EIX reports in just two segments: SCE and Edison Mission Group.

EIX has a strong track record of paying dividends. EIX's estimated forward dividend yield is 3.6% based upon a closing price of $35.98 and the author's projected annual dividend of $1.295. The following table shows the estimated forward quarterly dividends as well as the recent historical quarterly dividends.

Historical and Projected Dividends
Type Ex-Dividend Date Quarterly Dividend ($ per share) Change on prior year
Projected 6/28/2012 0.325 1.6%
Projected 3/29/2012 0.325 1.6%
Projected 12/29/2011 0.325 1.6%
Projected 9/28/2011 0.320 1.6%
Historical 6/28/2011 0.320 1.6%
Historical 3/29/2011 0.320 1.6%
Historical 12/29/2010 0.320 1.6%
Historical 9/28/2010 0.315 1.6%
Historical 6/28/2010 0.315 1.6%
Historical 3/29/2010 0.315 1.6%
Historical 12/29/2009 0.315 1.6%
Click to enlarge
Source: Author estimates, Yahoo!Finance
The following graph shows the historical trailing twelve month yield and spread to the 10-year Treasury bond.

Created from data from Yahoo!Finance

The next graph shows the normalized performance of the stock price, the dividend, and the trailing dividend yield.

Created from data from Yahoo!Finance

The above chart shows that EIX has significantly underperformed its dividend increases, suggesting that its future growth opportunities are not as strong as previously viewed. From Q3 2007 to Q4 2007, the dividend increase had been $0.015. More recent annual increases have been just $0.005 per share. EIX typically pays the same quarterly dividend for four quarters and then increases the amount for the next four quarters.
Dividend Discount Model Suggests EIX Is Overvalued
The first step to using the dividend discount model is to calculate an equity hurdle rate with the Capital Asset Pricing Model. EIX has a beta of .66 and with the risk free rate at a very low 2.2% this gives the discount rate to be a 6.8%. As noted above the forward dividend is approximately $1.295. Applying a long term growth rate of 1.6% gives an estimated price of $24.90 for EIX, which is a substantial discount to the current price.
However, as with any dividend discount model, the result is highly sensitive to growth rate and equity hurdle rate assumptions as noted below:
DDM Sensitivities
Sensitivity Equity Hurdle Rate
Growth Rate 5.8% 6.8% 7.8% 8.8%
0.0% 22.33 19.04 16.60 14.72
1.0% 26.98 22.33 19.04 16.60
1.6% 30.83 24.90 20.89 17.99
2.0% 34.08 26.98 22.33 19.04
2.5% 39.24 30.12 24.43 20.56
3.0% 46.25 34.08 26.98 22.33
Click to enlarge

Source: Author calculations

One can see from the sensitivity table that with a little more growth and lower discount rate, EIX would be closer to fairly valued. However, its very consistent track record of growth suggests not using a growth much higher than 2.0%.

Furthermore, I previously wrote about Portland General Electric (NYSE: POR). In comparison, POR has a trailing P/E of 10.7 to EIX 11.3 according to Yahoo!Finance. POR has a 4.5% forward dividend yield in comparison to EIX's 3.6%. In terms of growth, POR is also better with recent 1.9% dividend growth versus EIX's 1.6% growth. Both stocks have provided consistent increases in dividends and have similar betas, suggesting similar equity hurdle rates. My inclination would be to avoid EIX for now and look elsewhere, perhaps POR, for utility dividend investment opportunities. The counter argument is that POR is essentially a fully regulated utility while EIX has other operations that contribute value that might not be reflected in the dividends.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.