Tag Archives: alternative

Comparing Consolidated Edison And American Electric Power

In a previous article I detailed the past history of Consolidated Edison. In detailing this observation, it can be helpful to compare that security to others. This article compares the results of Consolidated Edison and American Electric Power, along with how you might think about the securities moving forward. In a previous article I looked at the past business and investment growth of Consolidated Edison (NYSE: ED ). This is useful for two reasons: it gives you a historical view of the company and it allows you to better think about potential repeatability moving forward. The historical look gives you much more insight than a simple stock price. Instead of seeing a line squiggle about, you can observe how revenues translate to earnings, earnings to earnings-per-share, EPS to share price growth and ultimately to your total return. There are a lot of factors at play that are not adequately captured in a stock chart. Moving forward, this type of information allows you think about the business in the future, with a solid understanding of how it previously got to where it was. If past investment growth was driven by an uptick in the earnings multiple or reduction in the share count, for example, these would be areas that you might want to explore on a forward-looking basis as well. Of course looking at a single security, even through the lens of various return drivers, does have its limitations. Its hard to tell whether revenue growth or investment growth is reasonable or not without also comparing this to other similar firms. As an illustration, let’s compare Consolidated Edison to American Electric Power (NYSE: AEP ), a similar-sized utility, to get a better feel for the company. Here’s a look at both companies historical business and investment growth during the 2005 through 2014 period: ED AEP Revenue Growth 1.1% 3.9% Start Profit Margin 6.2% 8.6% End Profit Margin 8.3% 9.6% Earnings Growth 4.5% 5.2% Yearly Share Count 2.0% 2.4% EPS Growth 2.1% 2.6% Start P/E 15 14 End P/E 18 18 Share Price Growth 4.0% 5.6% % Of Divs Collected 46% 43% Start Payout % 76% 54% End Payout % 70% 61% Dividend Growth 1.1% 4.1% Total Return 7.3% 8.4% From this table we can learn a variety of things. First, note that AEP was able to grow its revenues at a faster rate than Consolidated Edison. AEP also began with a higher net profit margin, and grew this over the period. Interestingly, due to the lower starting base, Consolidated Edison actually made up some growth ground in this area. Total earnings growth for Consolidated Edison came in at 4.5% per year against 5.2% for AEP. Part of the higher growth for AEP was offset on the shareholder level due to having to issue more shares. Once you get to earnings-per-share Consolidated Edison was growing at 2.1% per year against American Electric’s 2.6% annual growth. Allow the companies got there a bit differently, shareholders saw markedly similar growth during the time. Shares of both companies began the period trading around 14 or 15 times earnings and moved up closer to 18 times earnings by the end of the period. The P/E expansion was slightly higher for AEP, resulting in 5.6% annual share price growth versus Consolidated Edison’s 4% annual growth. This is an important point. It’s not just the ending valuation that matters, but also the expectations that lead up to that value. Consolidated Edison started with a higher dividend yield, but grew its payout at a slower rate. Still, an investment in the New York utility would have provided more aggregate income, resulting in closer overall returns. An investment in AEP would have generated 8.4% annual gains, while an investment in Consolidated Edison would have provided 7.3% yearly gains. As a point of reference, based on a $10,000 starting position, that’s the difference between accumulating $18,900 and $20,600. American Electric Power was able to outperform Consolidated Edison in the past due to its slightly faster earnings growth rate and higher valuation uptick. Consolidated Edison provided more dividends per dollar invested, but still trailed slightly. This type of view can illuminate a few things. First, even though the growth rates weren’t spectacular the returns were reasonable. A high starting yield and an uptick in valuation for both companies drove this result. Perhaps just as important, it shows you why one company might have turned in better performance and not just that it happened. Moving forward you could think about an investment in either security in a similar light. Here’s where things get less compelling, in my view. Below I have presented the same table substituting what actually occurred in the past with a hypothetical example for the next decade: ED Forecast AEP Forecast Revenue Growth 1.1% 3.9% Start Profit Margin 8.3% 9.6% End Profit Margin 9.3% 10.6% Earnings Growth 2.3% 4.9% Yearly Share Count 2% 2.4% EPS Growth 0.4% 2.4% Start P/E 18 17 End P/E 15 15 Share Price Growth -1.6% 1.1% % Of Divs Collected 40% 46% Start Payout % 72% 63% End Payout % 72% 63% Dividend Growth 0.4% 2.4% Total Return 2.3% 4.7% On the top line I used the exact same revenue growth, 1.1% per year for Consolidated Edison and 3.9% for AEP. Naturally these could be switched around or any number of different iterations, but the above is used specifically for a demonstration. The next two rows show improvement in the net margin of each company. So you have two companies growing revenue at the same rate as before, and actually keeping more of those profits. Yet the overall growth rate for both companies would still be lower. As a result of coming off a higher base, formulating growth becomes more difficult – it’s not enough to improve, you would need to improve by a greater and greater margin. If the number of shares outstanding also increased at past rates, you would be looking at rather slow earnings-per-share growth rates. Not that the past growth rates weren’t spectacular, but these would be noticeably lower still. With the same business performance, the growth rate is lower off a now higher base. It becomes more and more difficult to offer continued growth. The big difference between 2005 and 2015 is that today you’d likely want to be more cautious in your future multiple anticipation. Its certainly possible that these two companies could trade with P/E ratios of say 20 in the future, but I would contend that this might not be altogether prudent to expect. As such, share price growth could trail the already quite slow earnings growth. In turn, your main total return reliance would rest with dividends. Although the dividend yields are above average – sitting around 4% – they wouldn’t be expected to grow very fast. As such, you might anticipate collecting the dividend yield, seeing it keep pace with or even trail long-term inflation and not much more. A lack of strong growth, coupled with average to above average expectations, makes for a less compelling value proposition. Of course the above assumptions could be too pessimistic. Analysts are presently expecting 3% intermediate-term earnings growth for Consolidated Edison and 5% growth for AEP. Still, these assumptions would only bump the return anticipations up to the mid-single-digits. And to be complete, these higher assumptions can miss share count dilution and the possibility of a lower valuation in the future. In short, both Consolidated Edison and AEP as businesses didn’t grow very fast over the past decade. In spite of this, investors saw reasonable returns due to an uptick in what investors were willing to pay to go along with a solid ongoing dividend. In the future, you likely still wouldn’t expect these companies to grow very fast. However, this time the returns might not be as reasonable. The valuations are higher and consequently dividend benefits a bit lower. As the growth rate of a security slows, the relative expectations and valuation paid become more and more important.

Reaves Utility Income Fund: What To Make Of The Rights Offering

Reaves Utility Income Fund intends to do a rights offering. Forget about the minutia of the actual offering. Think – instead – about the reason for the offering. Reaves Utility Income Fund (NYSEMKT: UTG ) is one of my favorite closed-end funds, or CEFs, for those seeking utility exposure and dividend income. Its dividend history is nothing short of impressive and it has historically been a solid performer on a total return basis. That said, what should you make of the recent announcement of a rights offering? Impressive record One of the most notable aspects of UTG is its monthly distribution. Since the CEF first initiated a distribution in 2004, it has been increased eight times, most recently in December of last year. The distribution has never been cut, despite the fund living through the deep 2007 to 2009 recession. And, perhaps more impressive, the distribution has never included return of capital. Although the 6% or so distribution yield won’t excite those looking for 10% yields, it’s high enough to be meaningful and yet low enough to be sustainable. History has, so far, proven that out. Performance, meanwhile, is solid. The fund’s trailing 10-year return through September is an annualized 9% or so. That’s notably above Vanguard Utility ETF’s (NYSEARCA: VPU ) 6.6% annualized gain. Both numbers assume the reinvestment of distributions. To be fair, UTG’s mandate is broader than VPU’s, allowing it to invest in areas like oil, but the comparison provides at least a reasonable benchmark. That said, the more recent performance has been, well, not as good. UTG was down roughly 10% through September while VPU was down just 6.6% or so. It has been a bad year for utilities as well as some of the other areas in which UTG invests, so this doesn’t look like it’s an issue of management losing its way. Still, it’s not a good thing to see the value of an investment you own fall 10%. So why is UTG raising cash? Which might lead some investors to wonder why UTG recently announced a rights offering . Shareholders can get one right for every UTG share and buy a new share for every three rights they own. On the surface, this could look like a risky proposition since the fund is doing relatively poorly this year. If you are really cynical you might even suggest it’s a way to cover up a shortfall on the dividend front by spitting out the new cash as return of capital distributions. But step back and think bigger picture. Yes, UTG is doing poorly this year performance wise. Which, in turn, means its holdings aren’t doing so well, since UTG is nothing more than a pooled investment vehicle. If management believes this is an opportunity to buy good companies at depressed prices, its only option is to sell other holdings or raise more cash. But it can’t do that easily because it’s a closed-end fund. Thus, it has to go with a rights offering. In fact, the last time UTG did a rights offering was in 2012 . That was a relatively weak year for the fund, with a total return of around 5.8% compared to 2011’s over 14% gain (which was down from 2010’s 27% gain). In the CEF’s 2012 annual report it explained : “In August the Fund raised $144 million from a transferable rights offering. We view the rights transaction as a long‐term positive outcome for the Fund and its investors. The offering proceeds were invested principally in proven, current holdings of utility equities, increasing their portfolio weighting from just over 41% to 53%. The new investments enhanced the Fund’s current and potential future dividend yield. The outlook, after the offering, for Fund returns over the long term, gave us the confidence to announce in September the sixth increase in the monthly dividend rate since the Fund’s inception in 2004.” Essentially, the fund used the cash raised from the rights offering to buy more companies it knew well and believed were undervalued. It isn’t a stretch to think management is looking to do essentially the same thing this time around, too. If you are a Reaves shareholder this is probably a good deal for you. Will it be a good deal in the next six months? Maybe, maybe not. But longer term the CEF appears to be of the opinion that now is a good time to put money to work. And that should work out for you if you plan to stick around for some time.

So Far The Stock Split ETF Is Getting The Last Laugh

Summary Has Outperformed the S&P 500 Since Its Inception Last Autumn. Based On An Index That Began In 1996. Portfolio Features Multi Cap and Equally Weighted Names Updated Monthly. Introduction: A little over a year ago a new very different ETF came to market, the USCF Stock Split Index ETF (NYSEARCA: TOFR ). At first blush this idea for an ETF seemed somewhat preposterous, but upon reflection after a year and examining the index and methodology it may not seem as silly as some people have thought. It’s index is based on some solid back testing with well over a decade of data. Fund Highlights: The index for this fund is the 2 for 1 Index “SPLITS”, less fees and expenses. The expense ratio is 0.75%. The fund holds about 30 equally weighted mostly U.S. traded stocks that have recently split their stock within the last 6 months. The index and fund are rebalanced monthly with the oldest inclusion deleted and a new one added. According to the fact sheet : The pool of eligible companies is evaluated and ranked according to a proprietary methodology, and the top ranked choice is selected for the Index. This index is based on an investment newsletter that has been published since 1996. This newsletter, published by Neil Macneale, has data going back to 1996 when he first published the index. Macneale has calculated an annualized return of 10.75% versus 7.76% for an S&P 500 index fund. 2 for 1 Index Performance: Below is the 2 for 1 Index 10 Year performance chart from the 2 for 1 Index website. Holdings For The TOFR ETF: The holdings can be found here. They include some familiar and diverse names such as tech giant Apple (NASDAQ: AAPL ), water heater company A.O. Smith (NYSE: AOS ), railroad Canadian National Railway (NYSE: CNI ) industrial goods manufacturer PPG Industries (NYSE: PPG ), to name just a few. The fund holds about 80% domestic U.S. names and 20% foreign, with the largest amount in mid cap market capitalization names, but could be defined really as a multi cap fund. Portfolio metrics below from Morningstar. The Sector Breakdown Sector Summary Financial Services 20.37 Industrials 16.85 Consumer Cyclical 16.49 Utilities 10.61 Technology 9.91 Market Capitalization Breakdown: Market Capitalization Size % of Portfolio Giant 20.03 Large 13.09 Medium 35.9 Small 27.54 Micro 3.44 Fund Performance Since Inception (September 2014 to Present): (click to enlarge) Chart from Morningstar – includes the NAV and market price compared to S&P 500 since its mid September 2014 inception. The TOFR Stock Split fund has delivered some impressive results so far gaining over 5% versus around 1.4% for the S&P 500. The fund is lightly traded with only 4.8 million in AUM. Limit orders would be a wise approach if buying or selling this fund. If the fund continues to outperform then this fund should gain assets. Conclusions and Caveats: This fund may make a nice addition to a portfolios growth portion especially as the market settles down. After examining the funds documents, its performance, and index – this fund may be attractive but be advised it would likely have large draw downs in poor markets. That said, there appears to be a premium to the stock split phenomenon. Let’s hope this continues and is not eventually arbitraged away like many other off beat strategies. Always read prospectuses, fact sheets and other fund literature before investing. Use limit orders for lightly traded funds.