Consolidated Edison: 25% Annualized Yield On A Dividend Aristocrat's Next Payout

Summary

• Con Ed yields 4.26% and will go ex dividend ~8/13/20 for $.756.
• An August out of the money covered call option trade yields 2.5% in five weeks, or over 25% annualized.
• Earnings, guidance, analysts' targets, profitability, performance, financials, debt, and valuations are detailed.
• Looking for a helping hand in the market? Members of Hidden Dividend Stocks Plus get exclusive ideas and guidance to navigate any climate. Get started today »

Looking to replace some missing income from slashed dividends? You may want to consider selling options. Trading strategies such as writing covered calls and selling cash secured puts began to gain more traction in the 2008-2009 market meltdown, when previously dependable dividend-paying stocks began cutting their dividends.

Flash forward 12 years to the 2020 COVID-19 crash, and we're seeing that scenario play out again.

"S&P 500 companies slashed or suspended over $40 billion in dividends in the second quarter, the deepest quarterly drop since 2009." (Dow Jones)

Since option premiums are often much higher than quarterly dividends, you can replace some of your missing dividend income via some short-term and near-term option-selling trades.

There are several wrinkles to option selling. In general, you get paid lower option premiums when you sell at option strike prices which are further away from the underlying stock's price.

The flip side of that is that, when selling covered calls, you're less likely to have the underlying shares assigned/sold away from you. Conversely, when selling cash secured puts, selling at a put strike price which is further below the underlying stock's price/share lessens your chances of having that stock put/assigned to you.

This calls to mind a recurring theme in options selling - most veteran options-selling traders try to only sell options on stocks which they want to own or already own. Even though there may a whopper of an option yield on a volatile stock, there may be a good reason for that, so "seller beware."

If you want to play it conservatively, maybe consider selling options on large cap, well known stocks, such as one of the Dividend Aristocrats, for example.

Consolidated Edison, Inc. (NYSE:ED) was founded in 1884, and is a member of the Dividend Aristocrats, having raised its dividend for 46 consecutive years. It has three areas of operation - Utilities, Transmission, and Clean Energy:

(ED site)

This is definitely not the same Con Ed that NY-based boomers grew up with.

The modern era Con Ed's renewable segment operates in 19 states, is the seventh-largest solar producer in the world, and No. 2 in the US.

(ED site)

Earnings - Q1 2020:

Given that ED's biggest segment operates in the NY metro area, the first epicenter of the coronavirus pandemic, we could imagine that its earnings would've taken somewhat of a hit in Q1, as the shutdown began in March.

While revenue was off by -8%, and net income by -11.5%, adjusted earnings were flat, and adjusted EPS were down by -2.88%, not that bad:

The utilities segment contributes the lion's share of ED's earnings - CECONY generated $1.28 of the $1.35 company adjusted EPS total in Q1 2020, followed by the O&R segment with $.10.

(ED stie)

2020 Guidance:

Management adjusted ED's 2020 guidance downward on the May 7 Q1 2020 earnings release: "For the year of 2020, the company expects its adjusted earnings per share to be in the range of $4.15 to $4.35 per share. The company's previous forecast was in the range of $4.30 to $4.50 per share.

The company’s revised adjusted earnings per share range for the year 2020 reflects predominantly the impact of warmer than normal winter weather on steam revenues, and also the potential financial impact from the Coronavirus Disease 2019 (COVID-19) pandemic." (ED site)

This compares to adjusted EPS of $4.38 for full year 2019. At the low end of guidance, $4.15 implies ~-5% growth for 2020, while on the high end, $4.35 would be roughly flat. Not too bad if those numbers hold. Investors will get an updated look when ED reports its Q2 2020 earnings in early August.

Con Ed received rate updates in January 2020, which management estimated to have a three-year CAGR of 5.4% on its Q1 '20 presentation:

(ED site)

One positive factor in ED's favor is that NY state has seen a dramatic slowdown in new COVID-19 cases over the past several weeks. It would certainly be a boon to the local economy and to ED's commercial business if that trend holds. Fingers crossed for NY and all of our other states too.

Debt and Liquidity:

Management issued this update on the Q1 2020 earnings presentation. They plan to issue equity for up to $600M in 2020, which would roughly be ~8.3% of the current share amount. As of 3/31/20, ED had $1.3B in cash and cash equivalents, and $1.04B borrowing capacity available under its credit facility.

(ED site)

There's a large $1.97B debt maturity coming due in 2021, which explains the plan to issue new debt of $1.5 to $2B in 2020:

(ED site)

Valuations:

ED is a big fish in the utilities pond, with a ~$24B market cap. Due to its big price decline, its price/book of 1.3X is much lower than the industry average of 2.15X. Its trailing and forward P/E valuations also look cheaper than the averages.

Dividends:

ED yields ~4.2%, which is in the neighborhood of its highest yield over the past five years:

That's due to the drubbing it has taken in the COVID-19 crash. It's down -20.59% year to date, trailing the XLU Utilities ETF and the S&P 500. The utilities sector, traditionally seen as defensive, is struggling in 2020 due to massive business shutdowns/closures, which affect the utilities' commercial business. This has been partially mitigated by increased consumer demand, with millions of workers continuing to work from home. Since NY was the initial US epicenter of the virus, ED got hit harder than other utilities.

Management declared its regular $.756 quarterly dividend, which will go ex-dividend on 8/13/20, and pay a month later on 9/16/20.

Although ED's 46-year run of increases is very impressive, the five-year dividend growth rate is only 3.72%, since the yearly increases aren't that large. This is fairly typical of the Dividend Aristocrats - if management is targeting long-term consecutive yearly dividend increases, they're usually not going to make a large increase every year.

Analysts' Targets:

At $71.84, ED is just 5.47% below analysts $76.00 average target price. Of course, in our current uncertain environment, target prices may prove to be much more undependable than usual.

Options:

So, if you're thinking more short term, angling for some additional income/profit, here are two short-term ideas which may suit your needs.

Since Ed goes ex-dividend on 8/13/20, you can leverage that into some additional income, via selling an August covered call. The August $75 call strike is close to analysts' average $76.00 target price, and pays $1.10, a bit more than the upcoming $.765 quarterly dividend.

The three min profitable scenarios for this short term trade are:

Static - If ED doesn't go to or above $75.00 before the expiration date, you'd keep your ED shares, and end up with a $1.87 profit, consisting of the $.765 quarterly dividend and the $1.10 option premium. The return would be 2.6% in five weeks or 26.32% annualized.

Assigned - If your shares are assigned before the ex-dividend date, your profit would be $4.26, consisting of the $1.10 option premium and a $3.16 capital gain, for a return of 5.93%.

Assigned after the ex-dividend date - If your shares are assigned after the ex-dividend date, your profit would be $5.03, consisting of the $.765 in dividends, $1.10 option premium, and a $3.16 capital gain, for a 7% return in five weeks, or a scandalous-sounding 70.92% annualized gain.

If you'd prefer to get paid to wait, and achieve a lower breakeven price, selling cash secured puts can do the trick. ED's August $70 put strike pays $2.00, much higher than the quarterly dividend, offering you a 2.86% nominal yield in five weeks, or 35.96% annualized.

NOTE: Put sellers don't receive dividends. We use annualized yields in our tables so subscribers can compare trades of different lengths.

You can see more details for these 2 trades on our Covered Calls Table and our Cash Secured Puts Table.

All tables furnished by DoubleDividendStocks.com, unless otherwise noted.

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.