The Stock - Consolidated Edison Inc. (NYSE:ED):
In today's analysis, I wanted to review one of the classic names in the utility industry that also happens to be a Dividend Aristocrat - Consolidated Edison Inc. ED has a long history, from the company's humble beginnings in New York in the early 1800s to the beginning of electricity to becoming one to one of the largest utilities around today. Consolidated Edison has continued to innovate and expand their business to meet the needs of their consumers.
A few years back, I initiated a position in ED and the stock has performed quite well for me. I'm looking to determine if the stock is still undervalued and if I should consider adding to my position. What has caught my attention about ED is their long history of increasing their dividend. Plus, the fact that ED operates in a highly regulated industry with high barriers to entry has me feeling satisfied about the company's ability to grow their dividend going forward. My feeling of satisfaction will partially depend on the company's payout ratio, which we will assess later on in our dividend stock analysis.
To date, ED's stock is performing very well. In 2017 alone, the company is up over 15% (as of 6/16/17 close). This is slightly higher than the YTD performance of the Vanguard Utilities ETF (NYSE:VPU), which has increased nearly 12% so far in 2017. Typically, we seek undervalued dividend growth stocks. So why on earth am I reviewing a company that has appreciated over 15% during the year? Well, on top of seeking undervalued stocks, I am always looking to add to quality companies. Which is why I am so excited to run ED through the Dividend Diplomats' Stock Screener to see how well this company that is on a tear performs.
About Our Dividend Stock Screener
For those of you who are new followers, we run the Dividend Diplomat Stock Screener to identify potentially undervalued dividend growth stocks to analyze and potentially purchase. The Dividend Diplomats like to stick to 3 metrics when evaluating dividend stocks for considerations of a purchase. In our comparison, we will also compare the company we are analyzing to a competitor to gauge how the company performs in their respective industry, in addition to comparing them to the broader market. Here are the 3 metrics:
1. Price to Earnings (P/E) Ratio: We like to look for a P/E ratio that is below the S&P 500. The reason why we look for this is to show signs of undervaluation.
2. Payout Ratio: We further like to look for a company with a payout ratio of less than 60%. We choose 60% so the company has plenty of room to further expand their dividend in future years - it's that simple.
3. Dividend Increase History: Additionally, we analyze companies that have a proven track record of increasing their dividend. We don't go straight for the Dividend Aristocrats, but you have to have recent history, including the prior period, of increasing that yield.
With these dividend stock screening metrics, we may include additional items for consideration; however, these companies must break through the 3 barriers above. Typically, we also compare the company we are analyzing against competitors in the industry. This analysis will set the record for the most companies included in one of our dividend stock analyses due to the high volume of dividend paying utility companies. We will compare Consolidated Edison against the following three companies: American Electric Power Company (NYSE:AEP), Duke Energy (NYSE:DUK) and Southern Company (NYSE:SO).
1.) Dividend Yield: When you think of utility stocks, a high dividend yield is usually one of the first thoughts that pops into your mind. I would expect ED and the other utilities to have a yield well in excess of the current broader market place. As of 6/16/17, ED had a dividend yield of 3.28%, which represents a solid margin compared to the broader market. Interestingly, when compared to the other companies in this analysis, ED is actually on the lower end of the spectrum. ED's dividend yield is 124 basis points lower than the highest company of the three. It is interesting to me that ED's dividend yield is that much lower than SO and even DUK for that matter. Regardless, all four companies have pretty decent dividend yields, which matches my expectations for the industry.
2.) Payout Ratio: Typically, we use a 60% payout ratio threshold for stocks to pass our screener. However, similar to how I mentioned that I expect utility companies to have high yields, I also expect utility companies to have high payout ratios. So for the purposes of comparing utility companies, I am willing to look at companies with a dividend payout ratio in excess of our 60% threshold. ED's payout ratio is not that much higher than our 60% mark, which is a good thing. Meanwhile, competitors DUK and SO have payout ratios in the mid to high 70 percent range. Now, it is making sense why ED has a lower yield than their higher yielding, higher payout ratio competitors. I'm still willing to give ED a pass on this metric due to the fact their ratio is lower than their peers' and the payout ratio is not significantly higher than our 60% target. I would be much more concerned if the ratio were in excess of 80% and the company was close to paying out nearly all of their earnings.
3.) Dividend Growth Rate and History: ED is a Dividend Aristocrat and has increased their dividend for 43 consecutive years. ED checks the box in terms of establishing a history of increasing their dividend. However, there is a catch here. While the company continues to grow their dividend, management is not exactly increasing the dividend at a large rate. In fact, the company has a five-year average dividend growth rate of 2.45%. The dividend may increase annually, but the increase is in line with inflation and the real impact on your income stream is minimal. Compared to their competitors, ED is the only Dividend Aristocrat but has the lowest average dividend growth rate. Luckily, low dividend growth rates appear to be an industry-wide standard, as all four companies in this analysis have five-year average growth rates of less than 5%. For this metric, we will give ED a pass due to their Dividend Aristocrat status and the fact that their dividend growth rate is in line with their competitors.
4.) 5-Year Dividend Yield Average: I enjoy this metric because it is another way that we can assess the valuation of the company and potentially identify an undervalued dividend stock. ED's 5-year average dividend yield is much higher than their current dividend yield. Typically, I would say that this is an indicator that ED is potentially overvalued. But similar to the other metrics, this appears to be an industry wide trend as the other three companies in this analysis have current dividend yields that are less than their five-year average dividend yield. This makes sense though, given that ED is up nearly 15% YTD and the other three competitors have also been performing well in 2017.
5.) Price to Earnings (P/E) Ratio: Lastly, another valuation metric. For this metric, we look for the company's P/E ratio to be lower than the broader market's ratio. Currently, the S&P 500's P/E ratio is in the low 20s area. ED's P/E ratio is 20.6X earnings, which appears to be slightly lower than the broader market. Since our goal is to identify undervalued dividend growth stocks, the company barely passes this metric in our stock screener. Shockingly, compared to the other three companies, ED has the highest P/E ratio of the group.
Dividend Stock Analysis Conclusion
I leave this stock analysis on the fence. ED passes all the metrics in our stock screener, despite the fact that ED has a payout ratio that is slightly higher than the 60% threshold we use in our analysis. I am willing to overlook this due to the fact that utility companies typically post a higher payout ratio than other sectors in the market. What has me hesitating here is the fact ED has a lower dividend yield and a higher P/E ratio than some of the other companies in this analysis. Further, of the bunch, ED has the longest track record of increasing their dividend (by far). But their dividend growth rate is the lowest of the group. Man, I am having mixed emotions here about Consolidated Edison.
Ultimately, for now, I am going to pass on adding to my stake in ED due to the mixed results compared to peers. Plus, based on some of the craziness in other sectors of the marketplace, there appear to be other potentially undervalued dividend growth stocks that may be a better fit that will perform even better in our stock analysis. Since the utility industry appears to be trading higher than others for now, I will continue my search elsewhere.
What are your thoughts about ED and the broader utilities industry? Would you look elsewhere for better values? Or are you staying away from some of the other industries that have been trading lower recently?
Disclosure: I am/we are long ED.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I own a position in ED; however, I do not plan on initiating a position in the next 72 hours.