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Summary Consolidated Edison serves 3.4M customers in the New York City area. ConEd is a Dividend Champion having raised dividends for 41 consecutive years; a starting yield of 3.91% and a 5-yr dividend CAGR of 1.3% brings Chowder Rule to 5.21. In a slow and steady growth sector, ConEd is stable and is planning to grow by investing heavily in the electric and gas infrastructure investments in the next two years. Consolidated Edison Inc (NYSE: ED ) is a regulated electric, gas and steam utility delivery company serving New York City and Westchester County. The company serves 3.4M customers and is an iconic dividend growing company loved for its long track record of not only paying dividends — which it has paid since 1885 — but has raised those dividends for 41 consecutive years. The company operates in three segments: Consolidated Edison Company of New York (CECONY), Orange & Rockland Utility Company (O&R) and Competitive Energy Business. Corporate Profile (from Yahoo Finance) Consolidated Edison, Inc., through its subsidiaries, engages in regulated electric, gas, and steam delivery businesses in the United States. It offers electric services to approximately 3.4 million customers in New York City and Westchester County; gas to approximately 1.1 million customers in Manhattan, the Bronx, and parts of Queens and Westchester County; and steam to approximately 1,700 customers in parts of Manhattan. The company owns 62 area distribution substations and various distribution facilities; 39 transmission substations and 62 area stations; electric generation facilities with an aggregate capacity of 705 megawatts that run with gas and fuel oil; 4,330 miles of mains and 369,339 service lines for natural gas distribution; and 1 steam-electric generating station and 5 steam-only generating stations. It also supplies electricity to approximately 0.3 million customers in southeastern New York, and in adjacent areas of northern New Jersey and northeastern Pennsylvania; and gas to approximately 0.1 million customers in southeastern New York and adjacent areas of northeastern Pennsylvania. The company operates 572 circuit miles of transmission lines; 14 transmission substations; 62 distribution substations; 86,379 in-service line transformers; 3,991 pole miles of overhead distribution lines; and 1,869 miles of underground distribution lines, as well as 1,867 miles of mains and 105,077 service lines for natural gas distribution. In addition, it is involved in the sale and related hedging of electricity to retail customers; and provision of energy-related products and services to wholesale and retail customers. Further, the company develops, owns, and operates renewable and energy infrastructure projects, as well as invests in transmission companies. It primarily sells electricity to industrial, commercial, residential, and governmental customers. The company was founded in 1884 and is based in New York, New York. A Closer Look Consolidated Edison operates in one of the most vibrant and densely populated areas — New York City. Operating with a focus on the transmission and distribution business, the commodity exposure is less than other utility companies in the sector such as Southern Company (NYSE: SO ). The following chart provides an overview of the different segments of ConEd and the contributed earnings per segment. (click to enlarge) (Source: 2015 Wolfe Research Power & Gas Leaders Conference Presentaton ) The regulated nature of the industry has kept the stock performance stable and tempered through rough times in the economy. However, ConEd still has avenues to grow. The company’s forward-looking focus for growth includes: Delivering energy to a growing service area Energy conversion programs Oil-to-gas conversions Development of renewable energy Energy infrastructure investments for electric & gas transmissions and electric & gas storage. (Source: Created by author. Data from Capex Forecast 2014 10-K) One worrying trend that investors need to be aware of is that the utilities sector is seeing continued headwinds in revenue growth. There are various reasons, but the main ones are motivated by increased costs from utility companies to cover operating and overhead costs. In addition, revenue growth headwinds come from a combination of energy conservation, energy efficiency and shift towards independent power generation as renewable energy becomes more affordable and accessible for the end users. The following chart from ConEd shows the changes in electricity usage, which has seen steady declines from both residential and commercial users over the last few years. As electricity is the biggest segment in ConEd’s business, it should be something potential and current investors should stay vigilant about. (click to enlarge) (Image Source: ConEd Credit Suisse Energy Summit Presentation ) Dividend Stock Analysis Financials Expected: A growing revenue, earnings per share and free cash flow year over year looking at a 10-year trend. A manageable amount of debt that can be serviced without affecting future operations. (click to enlarge) (Source: Created by author. Data from Morningstar) (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: The utility industry is resilient and has seen a slow and steady rise over the years. Revenues and earnings are fairly constant with year-over-year growth ranging between -0.25% to +0.25%. The debt load is also stable and ED enjoys an “A+” credit rating from S&P. ED has a debt/equity of 1.07 and a current ratio of 0.90. Dividends and Payout Ratios Expected: A growing dividend outpacing inflation rates, with a dividend rate not too high (which might signal an upcoming cut). Low/Manageable payout ratio to indicate that the dividends can be raised comfortably in the future. (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: Utility companies are slow and steady growers and are perfectly suited for long-term dividend investors. Consolidated Edison is a Dividend Champion having raised dividends consecutively for 41 years. The 1-, 3-, 5-, and 10-year dividend CAGRs are 2.4%, 1.6%, 1.3%, and 1.1% respectively. Coupled with a current dividend yield of 3.91%, ED has a Chowder Rule number of 5.21. The current payout ratio is 67.7%. The payout ratio falls within the target range of 60%-70%. Outstanding Shares Expected: Either constant or decreasing number of outstanding shares. An increase in share count might signal that the company is diluting its ownership and running into financial trouble. (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: The number of shares have risen steadily over the years until 2011, but have stabilized since. Book Value and Book Value Growth Expected: Growing book value per share. (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: The book value is a bright spot in the company’s financials. The book value has steadily increased over the years maintaining a nice upward trajectory. Valuation To determine the valuation, I use the Graham Number, average price-to-earnings, average yield, average price-to-sales, and discounted cash flow. For details on the methodology, click here . The Graham Number for ED with a book value per share of $43.66 and TTM EPS of $3.77 is $60.86. Based on the last closing price, the stock is currently 10.15% overvalued. ED’s 5-year average P/E is 15.34, and the 10-year average P/E is 15.23. Based on the analyst earnings estimate of $4.04, we get a fair value of $61.97 (based on the 5-year average) and $61.53 (based on the 10-year average). ED’s average yield over the past five years was 4.67% and over the past 10 years was 4.99%. Based on the current annual payout of $2.60, that gives us a fair value of $55.67 and $52.10 over the 5- and 10-year periods, respectively. The average 5-year P/S is 2.16 and average 10-year P/S is 2.0. Revenue estimates for next year stand at $21.18 per share, giving a fair value of $45.74 and $42.35 based on 5- and 10-year averages, respectively. The consensus from analysts is that earnings will rise at 2.72% per year over the next five years. If we take a more slightly conservative number at 2.5%, running the three-stage DCF analysis with an 8% discount rate (expected rate of return), we get a fair price of $67.27. The following charts from F.A.S.T. Graphs provide a perspective on the valuation of ED. (click to enlarge) (Source: F.A.S.T. Graphs ) The chart above shows that ED is slightly overvalued. The Estimates section of F.A.S.T. Graphs predicts that at a P/E valuation of 15, the 1-year return would be -6.5%. (click to enlarge) (Source: F.A.S.T. Graphs ) Conclusion Electric utilities in general have seen slower sales industrywide amid a combination of energy conservation, energy efficiency and shift towards independent power generation/natural gas usage. The utility sector is a stable slow-growth sector that is revered during recessions by investors. ConEd fits the bill, as it has slowly and steadily grown the business over many years, although the stock is currently overvalued. Based on the metrics discussed above, if we give equal weight to all metrics, we get a fair value of $58.94. Remember that utilities sector stocks play a very different role in a portfolio — it will not rise fast, bringing amazing capital gains and quick wealth. What utility stocks bring to an investor’s portfolio is inertia and stability while providing steady and reliable income. One added risk for investors is the potential rise of interest rates by the US Fed. Bond substitutes such as utility stocks suffer the most in rising rate environments. Full Disclosure: None. My full list of holdings is available here . Scalper1 News
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