Dividend Analysis: Consolidated Edison

Consolidated Edison, Inc. (ED), through its subsidiaries, provides electric, gas, and steam utility services in the United States. The company is a dividend aristocrat as well as a component in the S&P 500 index. Over the past 10 years Consolidated Edison has delivered an average total return of 7.30% annually to its loyal shareholders. Dividends have accounted for the majority of this return. Historically, the best time to buy ED was on dips and dividend yield of over 6%.

The company has managed to deliver an unimpressive 1.50% average annual increase in its EPS since 1998.

The ROE has been decreasing from over 12% 1999 to a little over 7% 2004, before recovering slightly to 10% in 2007.

Annual dividend payments have increased over the past 10 years by an average of 1% annually, which is slightly below the growth in EPS. A 1% growth in dividends translates into the dividend payment doubling every 72 years. If we look at historical data, going as far back as 1979, ED has actually managed to double its dividend payments on average every fourteen years.

If we invested $100,000 in ED on December 31, 1997 we would have bought 2421 shares. Your first quarterly check would have amounted to $1283 in early 1998. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $2356 by November 2007. For a period of 10 years, your quarterly dividend has increased by 9.40 %. If you reinvested it though, your quarterly dividend would have increased by 83.60%.

The dividend payout has fluctuated greatly, along with the EPS and ROE. The current ratio of 67% does look a little high. When put into the perspective of the past 10 year’s average of 77.50 % though, it looks pretty normal for the company. Overall, a lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

ED is a slow-growing utilities company, which does offer a generous yield. The best time to purchase the stock over the past 10 years has been on dips and higher than average yields.

I do like the fact that the company is trading at a low multiple and has been able to consistently raise its dividends for over 34 consecutive years. I would require a yield of at least 6%, however, in order to initiate a position in the stock. If you are retiring in less than 10 years, you could buy a half position at current prices and then buy a second half below $39. I would be a buyer on dips below $39.

Disclosure: I do not own shares of ED.

Comments

[Econ Base:]

great analysis of a steady dividend play

2008 May 29 02:03 PM

[Mr Wheat:]

Yeah but you cant fully reinvest the dividends with out taking money out of pocket to pay taxes on the dividend income.

2008 May 29 06:29 PM

[barnburner:]

yes mr. wheat but aint it great for an IRA when one is retired.

2008 May 29 10:28 PM

[Dividend Gr...:]

Mr Wheat,

I didn't account for taxes or commissions. Taxes will vary from person to person so then the issue of why I chose higher or lower tax rates would arise :-). I do agree with Mr barnburner, that you could invest in stocks in a tax deferred account and let it compound tax free.

However, if you are in the business of living off of your investments ( which i hope I will be one day), you have the choice of either selling portions of your stock or getting a nice dividend check. When you sell the stock you pay a commission, you also pay capital gains taxes ( which could be higher than the dividend income taxes). In addition to that stock prices fluctuate greatly and more than the dividend rates.
With dividends on the other hand, you do have more stability in the payments over common stock prices. You do pay taxes, based off of your tax bracket, which currently are lower than cap gains. You don't have to sell any stock and you don't have to pay commissions to do that.
Capital gains could turn into capital losses if you don't sell your stock at a good time. Dividends,on the other hand are yours to keep. You could reinvest them, spend them, use them as wallpaper :-)
In fact reinvested dividends have accounted for the majority of returns of long-term investors.

2008 May 30 11:50 AM

[OneRichOne:]

I've been doing the stock market since I retired in 2002. This was done inside a traditional IRA and it has increased 5 fold to date.

2008 Jun 03 06:37 PM