Dividend Analysis: Consolidated Edison

| About: Consolidated Edison (ED)

Lets take a look at an S&P 500 Dividend Aristocrat that has a dividend yield of 5.04%! It also has a history of raising its dividend over the last 25 consecutive years. That company is Consolidated Edison Inc (NYSE:ED) which trades on the NYSE under the symbol ED.

Company Profile:

From Yahoo Finance

Consolidated Edison, Inc., through its subsidiaries, provides electric, gas, and steam utility services in the United States. It offers electric and gas service in southeastern New York and in adjacent areas of northern New Jersey and eastern Pennsylvania. The company also provides gas service in Manhattan, the Bronx, and parts of Queens and Westchester. It owns, leases, and operates generating plants and participates in other infrastructure projects. The company sells electricity to industrial and large commercial customers, and residential customers; and provides energy-efficiency services, which include design and installation of lighting retrofits, high-efficiency heating, ventilating and air conditioning equipment, and other energy saving technologies to government and commercial customers in the northeastern United States.

Consolidated Edison Inc has a market capitalization of $11.77B.

Company Fundamentals:

I always start my analysis with a look at how effectively management uses the money invested in its operation. I use the return on invested capital to make that determination. In this case, ED has shown its ROIC declining over the last 10 years from highs of 7% in the late 90s to below 5% over the last 3 years.

Return on equity has been better. The 10 year average ROE is 11.03% and the 5 year average is 9.99%. Once again, a declining trend. Cons Ed has lots of debt on its book. Its capital is made up of 51% debt. Equity growth rate has been consistently low in the 3% range. The good news is that it has been increasing over the last 10 year period from its 9 year average of 2.36% to its 5 year average of 2.89% to last year’s equity growth rate of 4.34%.

Unfortunately, the same cannot be said for earnings per share growth rate. This has in fact been NEGATIVE over the 10 year period at negative 0.83%. The EPS in 1997 is the same as it was in 2006! Sales growth rates have been fairly turbulent with lows of negative 12% to highs of 26%. Over the 9 year and 5 year periods, the sales growth rates have been in the 6% range.

Dividend Fundamentals:

As stated at the top of the post, ED currently has a dividend yield of 5.04%. That handily beats the dividend yield on both the S&P 500 Index and the DJIA. However, that yield may be all you get! The dividend growth rate over the 10 year period is 1.03%! It gets worse... In fact, ED seems to have a steady dividend increase of 0.88% now. At that rate, inflation will eat into your future dividends.

ED currently has a dividend payout ratio of almost 78%. Not much room for expansion here although it has been as high as 85% in the past. What about cash to pay for these dividends? Well, cash flow growth rate has been negative over the last 10 years.

Valuation Models:

As you know, I like to calculate model prices for my stocks so that I know if they are over priced or selling at a fair price. I use 3 valuation methods to give me an overall feeling on the stock price.

From a yield perspective, you would think that this stock must be selling at a discount with a 5.04% yield. However, the 5 year average high dividend yield is in fact 6.03%. So my dividend yield model price is $38.47. At the current price of $46.01, that is a premium of almost 20%.

Now, interestingly enough, the Graham number shows this stock to be selling at a discount! I think this is the first time I have seen the Graham number come up with a discount. The price works out to $47.26 which means a discount of 2.65%!

My discounted present value calculation was difficult, and here is why. Normally, I assume that an investor is only willing to give a stock a P/E ratio that is 2 times the future EPS growth rate. Well, I determined my future EPS growth rate to be 2.36% from the 9 year equity growth rate [and the analysts have only forecast 3%]. That means the highest P/E an investor should be willing to accept is 4.72. The current P/E is 14.38. So right there, you know that I am going to show a very low model price [which in fact worked out to be $8.27 and is a premium of 456%!].

Here is the 1 year stock price chart:

Stock Price Chart for ED


You can see that you may have been able to purchase this stock at the dividend yield model price of $38.47 back in April 2006. Since then, it has been on a tremendous climb. It has now pulled back fairly significantly.


In Cons Ed, you have a company providing a very nice dividend yield of 5.04%. However, that may be all that you get. In fact, you will get less as the dividend growth rates do not keep up with inflation! So little by little, inflation will eat away at your 5% dividend yield.

I would definitely not add this one to my dividend portfolio. The goal of my dividend payers is to provide future income. If they can’t keep up with inflation, what’s the point?

Full Disclosure: I do not own any shares in ED.

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