Consolidated Edison: Stock Analysis

Linked here is a PDF copy of my detailed analysis of Consolidated Edison, Inc. (ED) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: Consolidated Edison, Inc., through its subsidiaries, provides electric, gas, and steam utility services in the United States serving parts of New York, New Jersey and Pennsylvania.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

ED is trading at a discount to 1.), 3.) and 4.) above. If I exclude the high and low valuation and average the remaining two, ED is trading at a 14.8% discount. ED earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:

1. Rolling 4-yr Div. > 15%
2. Dividend Growth Rate
3. Years of Div. Growth
4. 1-Yr. > 5-Yr Growth
5. Payout 15% of avg.

ED earned one Star in this section for 3.) above. ED has paid a cash dividend to shareholders every year since 1885 and has increased its cash dividend payment for 35 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account [MMA]? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to >MMA.

ED earned both available Stars in this section. With a NPV MMA Diff. of $4,321, ED is well above the $3,000 I look for in a company that is both an Achiever and an Aristocrat. ED's current yield of 6.16%, exceeds the 20-year expected MMA rate of 4.61%.

Other: ED is both an S&P 500 Dividend Aristocrat and a member of The Broad Dividend Achievers™ Index. As a regulated electric and gas utility, ED produces a strong and steady cash flows. It has a solid balance sheet, an A- credit rating and operates in a historically supportive regulatory environment.

Conclusion: ED earned a Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and two Stars in the Dividend Income vs. MMA section for a net total of 4 Stars. This quantitatively rates ED as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price could go up to $41.39 before ED's NPV MMA Diff. drops to the $3,000 NPV MMA Diff. I like to see. At that price ED would yield 5.65%. I would be very comfortable adding to my position at the current price of $38.48 and a 6+% yield.

Disclosure: At the time of this writing, I own shares of ED (2.9% of my Income Portfolio).

Comments

[notsosmart:]

could face some huge outlays to fix aging generation & transmission.thoughts anybody.thanks

2008 Jul 29 11:49 AM

[svosavvy:]

Yes they are working on something called project "hydra" which is basically new infrastructure to help with old equipment. Also, there is a 22% rate hike going into effect which is good for shareholders that they aren't trying to do the brave thing which is to eat the margin loss from increased energy feedstock price.

2008 Jul 29 12:12 PM

[skwestorange:]

Good analytical work! Keep it up!

2008 Jul 29 12:53 PM

[User 8098:]

The stock price is now 38.56 and it has fallen from the 52 week high of 50.53. What's to prevent it from dropping to 30.00 ? That will negate the dividend yield for quite some time I would think. That factor was not considered in your analysis.

2008 Jul 29 11:17 PM

[nyka:]

User8098 -- Why stop at $30? How about $10? Your question could be applicable to any stock. Why would ED drop to $30?

2008 Jul 30 03:27 PM

[logicforlib...:]

I suspect people in New York will continue to use electricity in the future and ED will continue to profit from its delivery. It will be a long time for ED to reach ten bagger status, but it's history of profitability, history of divend payouts, strong balance sheet and cash flow all point to a solid long term investment. The price drop is on spectulation that the cost of infrastructure and upgrades will cut into earnings margin. With the rate hike, that is no longer a concern for me. Additionally, the upgrades will enhance efficiency.

2008 Aug 01 11:38 AM

[galegal:]

Thank you, Logic. That was exactly my thinking when I bought the stock around it's 52 week low. New Yorkers, especially apartment dwellers, to maybe a greater degree than folks in other parts of the country are unlikely to cut their energy use. Much of that use is institutional and controlled by people other than those who pay for it. The subways will run, the offices will be lit, heated and cooled, restaurants will use gas and people will continue to run their air conditioners The rate hike will still seem a bargain compared to the cost of a cab ride.
I like to read the statistical analysis but human observation is a greater motivating factor for me. I think ED will be my Yard Sale find of the month.

2008 Aug 03 06:40 AM

[Djolg:]

NGG bought natural gas infrastructure in area served by ED. Logically, NGG should buy ED for the same reasons. If not NGG, a different foreign buyer (or domestic) sitting with US dollars that are rapidly becoming worthless.
Bottom line: ED is also a take-over candidate.

2008 Aug 04 12:30 AM